.egiMation 



i^rem. \h(t ''\hion Guide' 



i^oi«s4©ja^ lejras. 



1PI14^ 







PHKSKXTKD BY 



\A_r\Pr. 



Cotton Future Contract Trading 



AND 



Adverse Legislation 



Editorials From the ''Union Guide'' 



OF 



Houston, Texas. 



1911-12 



HGrfeO^l 



■ cq 



\JL^ 



Houston, Texas, April 2, 1912. 

The question of Future Contract Trading has been agitated 
with more or less prejudice and violence during the past several 
years, and a great deal of misinformation concerning the same has 
been exploited. Eealizing the importance of a sane and correct 
solution of the problem, not onl^r to the producer of cotton but to 
the cotton trade of the South, I have made a study thereof and 
have published my conclusions in a series of editorial articles in 
the Union Guide. These articles have attracted the attention of 
a good many people who are earnestly in favor of improviug the 
conditions that maintain in the great cotton industry, and in 
response to numerous requests from these, I have re-pul)lished these 
articles in the present form. It is my earnest hope that these 
editorials will to some extent serve to bring aljout a better under- 
■ standing of a subject of vital importance to the people of the South. 

E. A. CALVIN. 



CHAPTER I. 
Cotton Exchanges and Prohibitory Legislation. 



The threatened passage of the Scott Anti-Cotton-Future Bill 
at the last session of Congress aroused so vigorous a protest from 
the bankers, business men and many farmers of the South, that the- 
advocates of drastic legislation along these lines may well pause 
in order to give more mature consideration to so radical and far- 
reaching a measure. 

It is not only advisable that the members of Congress should 
look further into the effects of such legislation before committing- 
their constituents to the trial of a possibly disastrous experiment, 
but these constituents themselves, and especially the farmers — they 
being most directly and to the greatest extent affected thereby — 
should demand that measures affecting their welfare be based upon 
intelligent and public spirited investigation and-l?onclusions, and 
not upon demagogic appeals to prejudice. 

Econoiiiic laAvs are like the laws of nature — if indeed they are- 
not the laws of nature. They are unchangeable and inexorable and 
the man or the community or the nation which undertakes to nullify 
these laws, or to interfere with the operation thereof, or to run 
counter thereto, will be broken as a twig in the hand of a giant. 
The old Dane who undertook to stay the incoming progress of the- 
tide by virtue of his royal command, was not more preposterous and 
futile than is the latter-day legislator, who makes a demonstration in 
Congress for the repeal of the law of cause and effect. 



The late Scott Bill and similar legislation pending, represents 
not only an attempt to try an experiment in legislation upon one 
-class of citizens alone and upon one section of our cotintry only, but 
is the concrete expression of a reckless desire to meddle with the 
complex machinery of a great trade system, upon the unhampered 
operation of which depends the welfare of many millions of people. 

It is not to be denied that the operation of the trade system 
hy which the cotton crop is moved from the fields and distributed 
to the four corners of the earth, is afflicted with some drawbacks, 
some imperfections ' and some abuses. But this is true of all trade 
systems and of all human enterprises, undertakings and develop- 
ments. These distempers of the body economic have been and will 
be seized upon by the seeker after notoriety, emolument or power, 
as the means whereby popular prejudice may be set ablaze and he, 
by the light of it. see the way to the goal of his desires. . But the 
true leader, the patriotic citizen and the public-spirited press 
should approach these problems from another standpoint. The aim 
of such teachers and workers should be first, to investigate and 
study the problems in order that the truth may be known, and then 
to direct their efforts to the end that the good may be appropriated, 
preserved and expanded, and the evils eliminated and destroyed. 

Approaching the Cotton Exchange and Future Trading problem 
in this spirit, we should primarily advise ourselves definitelv and 
accurately as to the nature and functions of the Cotton Exchange 
and of Future Trading; then we should examine into the part that 
these institutions and this trade system play in the modern methods 
of marketing and distributing the cotton crop : then we should study 
the advantages and benefits derived from the operation of the 
agencies in question: and then we should inquire into the evils 
complained of, the nature and source thereof ; and finally, we should, 
in the light of the information obtained, address our efforts towards 



such, regulation, restriction, prohib'^tion and encouragement, as-- 
would on the one hand eliminate all that is objectionable and 
injurious, and on the other preserve and strengthen all that operates, 
for the interest of the great cotton industry and for the advantage 
of the producers of the great trade asset of the South. 

Following the foregoing outline we propose in the first article 
to discuss the legitimate Cotton Exchange, what it is and what it is 
not; and what the results upon the cotton producer and the cotton, 
trade would be if its functions were suspended by legislative prohibi-- 
tion. 

COTTON EXCHAN^GE AND BUCKET SHOP 
DIFFEEENTIATED. 

In the agitation that a few years ago swept the country, the 
terms "Bucket Shop" and "Cotton Exchange" were used indis- 
criminately as if — and indeed as was concluded by many — they 
meant the same thing. At the time in question a very real evil 
was in existence throughout the South, and very reprehensible: 
conditions prevailed. - Speculation was then rampant, not only in 
the Southern States, Imt throughout the entire country as well. Mem 
who desired to profit by this mania for speculation esta1)lished' 
offices or so-called "Cotton Exchanges" in a multitude of towns 
both large and small throughout all the South. "These people made' 
it possible for men of small means, clerks, and even women and' 
children to speculate or gamble, as they untruthfully announced,, 
"in cotton'' These offices were not Cotton Exchanges, but Bucket" 
Shops, and the speculators in these offices were not trading in cotton 
or in cotton contracts, but were simply betting with the proprietor 
upon the fluctuations in price that occurred in the cotton market. 
It is important that the distinction between a Cotton Exchange and 
a Bucket Shop should be clearly understood. In a legitimate Cotton 
Exchange binding and e'nforceable contracts are made for present 



-and future delivery of cotton^ and the prices at whicli such cotton is 
bought and sold^ both for present and future delivery, are posted 
upon the blackboards of the Exchange and telegraphed throughout 
the world so that all who are interested may know what traders are 
^?aying for cotton and, consequently, be apprised of the value thereof. 
In a Bucket Shop no contracts whatever are made. Xobody buys 
any cotton or sells any. The proprietor of the Bucket Shop, for the 
purpose of masking his game, adopts the nomenclature of the 
leg-timate exchange and of the actual cotton trade. But in fact all 
he does is to bet his victims that the i^rice of cotton, as registered 
by actual contracts and trades in the Cotton Exchange will go up or 
down, as the case may be ; and all the victims of the bucket shopper 
do, is to take the other end of the bet. The Cotton Exchange, if 
fairly and equitably conducted, is no more to be condemned and 
destroyed because of the practice of bucket-shopping, than is the 
ocean liner to be condemned and prohibited from crossing the seas 
because some individuals see tit to bet with each other on the speed 
at which the vessel will travel. 

But, as has been said, the terms "Cotton Exchange" and 
■■'^Bucket Shop"' were used indiscriminately, with the result that to 
the many who did not understand the difference, the actual evil 
which thev observed proceeded from the Bucket Shop in their town, 
was inaccurately attributed, and denunciation thereof applied, to 
the Cotton Exchanges in the great markets of the world. Thus the 
Cotton Exchanges, no matter what their faults may be, have been 
through inaccurate and unthinking generalization, accused and con- 
demned for faults in no just sense attributable to them, and for 
evil practices which the Exchanges have done their very best to 
•destroy. 

THE LEGITIMATE COTTON EXCHAl^GE. 

The legitimate Cotton Exchange is a place where buyers and 
^sellers are brought together and trading conducted at less expense, 



with more facilit}^, and in greater volume than could be done if the 
traders were separated; it is an organization which establishes 
communication with the other markets, both foreign and domestic, 
and collects information as to values and conditions, and statistics 
and reports as to the progress of the crop, the state of the dry goods 
trade, and the amount of cotton taken by spinners; it frames rules 
for the government of its members and the trading between them, 
among them.selves, and with non-members; and finallv it establishes 
tribunals before which disputes may be settled and punishment 
intiicted upon offenders against honorable conduct in business. 

Originally the trading in the Cotton Exchanges was limited to 
*'Spot" transactions, i. e., to th? purchase and sale of cotton actually 
in hand. But as production increased and consumption grew, it 
was found that a need existed for trading in future contracts, or in 
other words, for buying and selling cotton for delivery at some time 
in the future. In order that such trading should be conducted with 
satisfaction and efficiency, the Exchanges in Avhich such trading 
prevailed, adopted a form of binding contract which must be signed 
by the parties thereto, and formulated rules governing the conduct 
of the business. 

In the course of time there came into the markets a class of 
traders who, although they did not manufacture cotton goods them- 
selves, were willing to buy cotton when the}^ thought the price was 
too low, in order that they might sell later at a profit. These traders, 
therefore, competed with the spinners. They not only bought and 
sold cotton for present delivery, but also bought and sold contracts 
for future delivery. The supply of contracts furnished by these 
traders, as well as by those who had cotton which they wished to 
sell, and by spinners who wished to buy to fill future consump- 
tive needs, constituted what is known as the Future Market, and 
made possible the very important facility of "hedging." 



8 

The prices for future deliver}^ made by trades in future con- 
tracts rejDresent the consensus of opinion of the traders as to the 
probable value of cotton at such future time. If the Future Market 
is in the producers' country where the great majority of men hope- 
that cotton will advance in value and are by this hope influenced 
in their opinion^ then the prevaling future prices in such market 
will be relatively high. If, on the contrary, the Future Market is 
located in the spinners' country where most men hope that cotton 
will go down and, consequenth^, believe that it will do so, then the 
prevaling future prices in such market will be relatively low. In 
order that the trade may be advised of present conditions and be 
able to form some opinion as to prices in the future, the Exchanges 
at a large expense collect reliable data covering all the conditions 
both of crop and trade, that go to make prices. This information so 
gathered, is by the Exchange disseminated throughout the country, 
with the result that every day and at all times during the day the 
farmer or the merchant, even in the small towns of the country, 
know what cotton is worth in all the markets, are apprised of con- 
ditions which would likely affect prices, and hence cannot be misled 
or duped by intending buyers, into selling cotton for less than its 
value. 

The laws of the several Southern States have practically 
eliminated the evil of bucket shopping heretofore referred to. But. 
now the effort is made in Congress not only to prevent betting on 
the fluctuations in the price of future contracts, but to prohibit 
the maling of future contracts; not only to close up the Bucket 
Shops, but to destroy the legitimate Exchanges as w^ell. "We will 
hereafter discuss more in detail the beneflts derived by the farmer 
and all legitimate interests through the agency of future trading 
per se, and the loss tliat would be occasioned if such trading were 
prohil)ited. Here we will call attention to the most obvious ill 
results that would follow the enactment of a law directed against 
Ihe legitimate American Exchange: 



9 

1st. If the American Future Exchange was closed^ then there 
would remain only the Liverpool and Continental Exchanges inr 
operation. These exchanges are Spinners' exchanges. No cotton is; 
produced in those countries^ but there are many mills. The spinner 
desires to buy cotton as cheaply as possible^ and in any future 
market dominated by the spinner and his friends the prices would 
naturally and inevitably be forced down as low as possible. With 
no resistance on the part of the producer and his friends^ the: 
contest would be one-sided and unequal^ and hence the price-making, 
'power would be surrendered to foreign interests^ and the farmer- 
would have to sell at the low prices fixed by the spinners in Liver- 
poolj Bremen and Havre. 

2nd. If the American Future Exchange was closed then all 
the information as to the price of cotton in all the markets of the 
world and all the information as to conditions which go to make up' 
the price and the price outlook, would be no longer disseminated- 
The buyer and spinner would know what the Liverpool Exchange- 
and the other foreign exchanges were doing, but the farmer and the 
merchant, especially in the small towns, would be in the dark. Thus 
the producer would be at the mercy of the buyer, and all the Amer- 
ican cotton trade would be at the mercy of the foreign spinning, 
interests which would be intent upon buying cotton as cheaply as. 
possible. 

These preliminary considerations are commended to the serious' 
thought of the farmer and of all those who are his friends. Before' 
supporting any anti-future bill, those interested should be very 
sure that the measure would not produce the results outlined above- 
Some legislation is necessary in order that the operations of the* 
exchanges should be equitably regulated, but this question, like all 
others of legislative agenc}^, should be handled with discretion and 
discrimination. 



10 
CHAPTER II. 

Anti-Option Legislation. 



Extreme legislation as a general thing is like a two-edged 
sword — it cuts both ways. Legislation not always extreme often acts 
in the same manner if not given proper consideration. The tariff 
question for example : Free trade is ideal. To be enabled to buy 
in the cheapest market and sell in the dearest without let or 
hindrance, is the sum and substance of free trade. "We want free 
bagging and ties for baling cottom because the tariff on these is a 
burden to the cotton proditcer and helps the bagging and steel trusts, 
but we do not want free foreign raw cotton, because the Egyptian 
cotton grown by cheap labor comes in direct competition with our 
long staple, and its encouragement cuts profits on the home product; 
and so on along the line. We are free traders in theor\\ because the 
theory is ideal, l3ut like all other things good on their face, it is 
subject to numerous exceptions. 

And so it is with legislation: what on its face may seem good 
and fit, may prove on application not unmixed with evil. 

Xot a few among our best thinkers among the farmers have 
believed the only way to abate the evils that have fastened upon the 
cotton trade is to abolish the Exchanges. To prevent the making 
of contracts for the purchase or sale of cotton for future delivery, 
unless coupled with conditions practically prohibitive. 

This is what the so-called Scott Bill proposes. 

But are there not two sides to this matter? Xo one questions 
the sincerity of the advocates of the Scott Bill; but would the 
measure, if adopted, accomplish the ends sought? Would it abolish 
futures ? It would in the great Exchanges of Xew Orleans and Xew 
York as far as interstate commerce in the United States is con- 
cerned. It would drive away millions upon millions of dollars of 



11 

American capital which now help us to move our crops and obtain 
cash mone}^ for them with the same facility and promptness that one 
^vith money in bank can cash a check. But how about Liverpool 
and Havre and Bremen ? They would go on the same as ever, only, 
with our American Exchanges crippled and unable to put up a 
tight in behalf of American cotton, the foreigners might dictate 
prices. Is it to be supposed that they, the representatives of the 
foreign spinners, would work in favor of the American farmer? 
Would they pay any more for our cotton than they could help? 
Past history does not show it. How about the future? Would the 
leopard change his spots ? They would try to buy their raw cotton 
as low as possible and sell their manufactured goods as high as 
possible. The British lion makes a handsome picture as far as lions 
go, but it is safest to keep American heads out of his mouth. France 
and Germany are our good friends in the way of trade for what 
they can make out of us. Germany tried prohibition of futures, but 
has changed her law and Bremen is about commencing the Future 
business again. Bremen has already made enough on arbitrating 
American cotton to build the handsomest Exchange in the world. 
Is it so sure that we need such a radical change as the Scott Bill 
would force ? Do our farmers want to be brought face to face with 
the spinners, with none to intervene between them? We market 
in the first six months of the year nearly twice as much cotton as 
the spinners need in the same time. Who then is to take or carry 
the surplus when the mills buy only as they need the cotton, if we 
drive away the capital which has been performing that service? 

The capitalist or speculator will not consent to carry cotton 
unless he is able to hedge against a possible decline. The average 
buyer in the country will not buy our cotton unless at a wide margin 
and even at that he will hesitate if there are no American future 
markets in which he can hedge. The small buyer who now competes 
for our cotton in country towns will be driven out altogether. 



12 

One has only to go ov-er the newspaper files before the establish- 
ment of futures, to show what would be in store for us if we return 
to old conditions. These are matters which require serious con- 
sideration at the hands of farmers. 

Look at the record this and last year : Last year we got for our 
cotton crop including the seed, $902,000,000. This year we will 
receive more than one thousand millions of dollars for the crop, 
including the seed. The calculation is easy. Already up to the 
close of March we had sold $818,000,000 and the remnant of the- 
crop which is selling at an average of $75 per bale and over will 
bring $84,000,000. Add to this $125,000,000 for the seed and we 
have a total of one billion and twenty-seven millions. 

Xo two crops bi^ or little ever brought near such amounts. 

And 5'et all the time throughout these two remarkable years the- 
mills have been crying bad trade, short time. These results have, 
been obtained under a system of trade, including futures. Would 
that have l3een the case had the middleman who carried the surplus, 
been unable to hedge his purchases? Would he have been able to 
eay to the mills ''the cotton is worth the money and if you don't 
buy it at the price I will, and will make you pay more when you are 
forced to buy?"' 

Suppose these men who took die chances had been driven out by 
law, would we have ol}tained nearly two thousand millions of dollars, 
for the two crops? That is a more than serious question. Some 
of the advocates of the Scott Bill claim we would have gotten more. 
But how? The spinners have not paid us one cent more than the\ 
were forced to. If they could hare had their own way, they would 
have j^aid ten to twentv dollars a bale less. Take the records of the 
past ten years and we will find that $45 to $55 per bale has not 
been an unusual price for cotton. What would such figures havb 
meant compared with $T5 and over for tlie two years just ending. 
Anywheres from four hundred millions to seven hundred millions- 
of dollars. 



13 

We do not say that such would have been the case, but it is not 
beyond the bounds of possibility. Would it have been conservative 
to take the risk ? 

We do know that if existing business methods are disrupted 
the result, for a time at least will be chaos, and while a new order 
is being established who will pay the losses? Do not all costs 
incident to marketing come out of the cotton itself? 

While the future system has been in force the trusts with all 
their billions of money have not dared to interfere with cotton. 
They have tackled Sugar and Iron and Bagging and Lumber and 
Oil and other commodities which have no futures. In cotton every 
man who considers cotton is cheap has an opportunity to buy 
through the future market and the combined means of the many, 
offsets even the great assets of the trusts. Even the Eoth^childs have 
always steered clear of cotton. 

Would it not, therefore, be wise to exercise some conservatism 
in dealing with this important matter ? 

If the institution of futures is of ^benefit we should conserve 
the good in it. What is bad should be eliminated, but in the 
elimination that which is of benefit should not be destroyed. 

Bucket Shops should be prohibited throughout the United 
States; they are only bettors on the price of cotton as established 
in the Exchanges. Jlo contract should be permitted that does not 
give to the buyer the legal right to demand the cotton and none that 
does not give to the seller the right to deliver the actual cotton, and 
no contract should be permitted that is not settled upon the actual 
prices which prevail from day. to day for the grades of cotton specified 
therein. No contract should be permitted which specifies that 
differences between the difi^erent grades shall be arbitrarily fixed for 
months upon months regardless of the actual market prices therefor. 

The banks are under government supervision, why not cotton? 
Why not try supervision instead of abolition ? 

The United States government has through its Bureau of 



14 

Corporations completed perhaps one of the most exhaustive investi- 
gations of the Exchanges and the Cotton Future Business that has 
ever been made in relation to trade matters. The report of Com- 
missioner Herbert Knox Smith embraced every phase of future 
contracts, their advantages and the correctives needed to bring 
the system into line with the interests of the grower of cotton. 

A measure in keeping with Commissioner Smith's recommenda- 
tions is well worthy of trial. This with Government supervision to 
enforce the law in letter as well as in spirit, it is claimed, will 
remove objections now urged while retaining its advantages as an 
adjunct to the marketing and sale of the cotton crop. 

Would not that be a better plan than risking a radical experi- 
ment, the result of which may or may not prove doubtful? 



15 

CHAPTER III. 

Nature of the Future Contract; and Method of Trading. 



Having in a former issue discussed the functions of a legitimate 
Cotton Exchange with particular reference to future contract trad- 
ing; and having differentiated such an Exchange from the nefarious 
institutions designated as Bucket Shops^ and distinguished the 
future transactions conducted in the former from the gambling 
ventures undertaken in the latter; it is now in order to give some 
more particular attention to the nature of the future contract and 
the method of trading therein. 

FUTUEE CONTRACT A BINDING OBLIGATION. 

Much misunderstanding has existed and much misinformation 
has been disseminated in regard to the contract for future delivery 
of cotton. It has been dogmatically affirmed by anti-future advocates 
that the future contract was a sham and a mere subterfuge invented 
for the purpose of giving apparent legitimacy to a purely gambling 
hazard. Wliile it is true that there is and has been and must be 
speculation in future contracts^ it is not true that the contract for 
future delivery under the rules of a legitimate Exchange is unreal 
or a delusion and a sham. On the contrary^ such contract to deliver 
or to receive cotton at some specified time in the future^ is a binding 
obligation specifically enforceable both under the rules of the 
Exchange and in the courts of law. If any one doubts the validity 
and reality of such contracts let him sell on the Exchange a hundred 
bales of cotton to be delivered in some future month, or let him buy 
for reception at some future time, and if he does not, before the 
maturity of the contract, dispose of the same or transfer his 
obligation to some one else, he will find that he must deliver or 
receive, as the case may be, or else pay the same penalty he would 



16 

pay in the case of a. breach of any other contract. And furthermore, 
Tiot only is such future contract enforceable, but it is aiso secured; 
•each party being required to put up collateral sufficient to protect the 
'Other party from loss in the event that the one party or the other 
fails to specifically receive or deliver according to the obligat'on in 
the contract. 

lEXECUTIOX AND TEANSFEE OF CONTEACTS. 

Briefly the form of the future contract and the methods of 
trading therein is as follows : A, who is a principal, gives an order 
to B, who is a broker, to buy say 100 bales of cotton to be delivered 
in October. Y, who is a principal, gives an order to X, who is a 
l)roker, to sell, say, 100 bales of cotton for October delivery. B, the 
"broker, bids a price per pound, basis middling, for the said 100 bales. 
X, the other broker, accepts the bid and sells for the delivery stipu- 
lated and at the middling basis price agreed. B and X, the brokers, 
thereupon enter into a binding contract in the form prescribed by the 
Exchange whereby the one agrees to receive and the other to deliver 
the actual cotton covered thereby, at the time and at the price 
stated, and furthermore each is required to give to the other security 
that the contract will be carried out according to the terms thereof. 
A and Y, the principals in the premises, are responsible to B and X, 
-who are acting as agents or brokers, and B and X are representing 
their principals A and Y. The contract is now made and signed 
and the obligation of all parties fixed and determined. 

If the principals A and Y, give no further instructions in 
regard to the contract, when October comes, X, the broker, must 
deliver to B, the other broker, 100 bales as per contract and B must 
receive and pay for said cotton. In such case X delivers the cotton 
for account of his principal Y, and B, receives the same for. account 
-of his principal A. This is the simplest form of future contract 
trading. 

But suppose that after the contract has been signed and entered 



into by B and X^ the brokers ; A, the principal who has bought the 
100 bales, decides that for some reason he does not v/ant to take 
'delivery in October. Perhaps he had bought the -contract for the 
purpose of hedging a sale of some specific grade or some special 
kind of cotton which he had contracted to deliver to a spinner, not 
having said cotton in hand at the time : When, therefore, he had 
purchased the specialty, he would have no further need for the 
future contract. In such case he would tell B, his broker, to sell 
his contract, or in other words, to find some one who would take 
his place and assume the obligation to receive the cotton in October. 
C, an entirely new party, wants, at this time, to buy 100 bales for 
October delivery. He, therefore, through his broker, at a price 
-assumes A^s obligation as principal to the broker, B; the contract 
between B, the broker, and X, the other broker, remaining intact. 
In the same way, Y, the other principal in the original obliga- 
tion, may desire to be relieved of his obligation to deliver the 100 
bales in October, he having in the meantime disposed of the 100 
bales of cotton in hand against which he had sold the contract as 
a hedge. He, therefore, tells his broker X, to get some one to 
take his, Y's, place and assume his obligation to deliver the cotton. 
W, another new party, desires at this time to hedge some cotton 
he has in hand, by selling the same for October delivery. He, 
therefore, through his broker, at a price, assumes the obliga- 
tion of Y, the original principal in the premises. The contract 
between B and X, the brokers, remains intact and each is bound as 
firmly as ever, the one to receive and the other to deliver 100 bales 
in October, but the principals, to whom both brokers look for per- 
formance, are new. Thus the principals may change any number 
of times before the maturity of the contract, but when it does 
mature, it must be liquidated in accordance with the terms thereof. 
The two brokers are responsible to each other for this performance,, 
but they discharge, their obligation to each other for the account of 
their respective ultimate principals. 



18 

.From the foregoing it will be seen that the future contract 
entered into under the rules of a properly organized and equitably 
regulated exchange, is not a nefarious or dishonest subterfuge but a- 
dpfinite and binding obligation : and fuithermore, it will appear that 
these contracts having been once properly and validly issued^ may 
be bought or sold or transferred in the course of trade, just as a- 
promissory note, *or other obligation, once issued, mav be bought 
or sold or transferred for a consideration. 

LAEGE YOLr:\IE OF TEADIXG LOGICAL A:N"D 
XECESSAEY. 

"When the modern trade methods of moving the crop are under- 
stood, no difficulty will be experienced in appreciating the fact that 
from the time the farmer parts with possession to the time when 
the cotton reaches the ultimate consumer, it passes through many 
different hands and is the subject of diverse and successive owner- 
ship. The same lot of cotton passes from the farmer to the 
merchant, and from the merchant to the buyer and from the buyer 
to the spinner or from the buyer to another buyer or exporter, and 
from such other buyer or exporters to still others until it reaches 
the spinners' hands and is spun into cloth, sold to the cloth mer- 
chant and finally to the man who wears the clothes made therefrom. 

All of these intermediate owners are subject to the risk of 
ownership or of contract with reference thereto: i. e., the risk of 
fluctuations in the price of the cotton during the time such cotton 
is in their possession pending disposition of the same, or before they 
can get possession of cotton with which to fill a spot contract 
previously made. These owners or contractors in spot cotton 
desire to protect themselves against the risk of such fluctuations, 
and in order to do so they send to the Exchange and sell or buy a 
future contract, or future contracts, for the purpose of hedging their 
specific grade transactions and contracts. This multitude of traders 
in the future markets engaged in the non-speculative effort of pro- 



19 

tecting themselves against price variations, necessarily inaugurate 
a multitude of trades and thus create a volume of transactions 
which to the uninformed observer appear to be out of proportion to 
the amount of cotton at the time actually in existence. 

One of the principal and most insistent arguments of the 
opponents of future trading is drawn from this very fact that the 
Volume of future transactions is largely in excess of the actual 
crop grown. They claim that legitimate future sales and purchases 
must be limited to the actual crop and that any over-plus of contract 
trading is necessarily fictitious and representative of speculative 
transactions. 

APPAEENT EXCESSIVE FUTURE TRADING EXPLAINED. 

Having in mind the analysis of the future contract, and the 
meth(!»d of trading therewith, heretofore given, it will not be 
difficult to account for this apparent excess and to explode the 
fallacy of the argument mentioned. It is desirable that the reader 
shall keep clearly in mind the distinction drawn, in a preceding 
section of this article, between the mahing of the future contract 
and the buying and selling of the obligations imposed hy such con- 
tract. 

In the first place each future purchase and sale made in the 
'Exchange may not, and in fact every such purchase and sale does 
not, represent a new transaction, but a transfer to other parties of 
a contract already made. For instance, A and Y, in the original 
illustration may through their brokers enter into a contract for the 
purchase and sale of 100 bales of cotton for October delivery. Before 
the contract matures and is liquidated by specific and actual delivery, 
it may have been assumed by as many other parties as there are 
letters in the alphabet. Each of .these transactions is apparently 
new, but is in fact only the transfer of the obligations of the 
original contract or the substitution of new parties thereto. These 
several transfers are counted by those who do not understand the 



/ 20 

system as cumulative contracts^ when as a matter of fact they are 
successive contracts covering the same obligation. 

By way of illustration : Suppose a man had $100 in the bank. 
He issues a check for this amount, which he delivers to the drawee. 
This represents the original transaction. Now suppose the man in 
whose favor the check is drawn, transfers the same to some other 
payee, and he in turn, to another and so on. Finally the last holder, 
of the check will collect the $100 from the bank and then the 
original contract represented by the check is specifically performed. 
In the meantime, however, the check may have passed through a 
number of hands and may have been the means of liquidating a 
number of $100 obligations, although there has never at any time 
been any more than $100 in the bank against which the check 
was drawn. Each one of these transfers was a perfectly valid and 
proper transaction and yet if we take the cumulative total we will 
find that business amounting to $1,000, perhaps, had been transacted 
on the one $100 check. The argument of the anti-future advocates, 
if applied to this illustration, would hold that only the original 
transaction was valid and that the trans-actions in excess of the $100 
in bank were spurious and counterfeit. 

The foregoing explanation accounts for some of the apparent 
excess of future purchases and sales, but there are other important 
explanatory phases of this seeming discrepancy, which should be 
considered. 

If the contention that the number of bales legitimately bought 
and sold for future delivery must be limited to the number of bales 
actually in existence, was sound, then only one man could hedge a 
given lot of cotton and he could only hedge it once. If this con- 
tention was sound, then the first owner could legitimately hedge, 
but the second, or third, or fourth owner could not: or the ownei 
could legitimately hedge his cotton by selling a contract against it 
for delivery in a specified month, but if when that month came and 
he was not readv to deliver and he transferred his contract to mature 



21 

in another month, then such second contract, although it covered 
the identical same bales of cotton would be a gambling contract and 
a counterfeit. Such is the reasoning of the anti-future advocates 
mentioned, as applied to the actual and every day transactions in 
the cotton business. The fact that it is not only legitimate but 
necessary in instances that the same lot of cotton must be hedged 
by several different owners, or by the same owner several different 
times has a large share in explaining the apparent excess of future 
purchases and sales complained of, and definitely exposes the fallacy 
of the dogma that the excess of cumulative purchases and sales for 
future delivery over the number of bales actually grown, is proof 
of the speculative and injurious character of future contracts. 

EXCHANGES' MUST BE IMPAETIAL AXD COXTEACT 

FAIE. 

The nature of the future contract has now been explained and an 
exposition of the system by which the same is successively trans- 
ferred and finally liquidated has been given. It now begins to be 
apparent how great a part the future contract and the future trading 
facility plays in the actual spot transactions whereby the crop is 
moved at the least expense and risk to all concerned. In the next 
article we will show the practical application of future contract 
trading to the actual spot business, and illustrate the dependence 
of the non-speculative dealer, whether he be producer, merchant, 
buyer, exporter or spinner, thereon. 

These discussions, designed to impress upon the farmers and all 
interested in cotton the great importance of exchanges and of the 
future trading system to the modern economy of trade, be it clearly 
understood, presupposes honesty and fairness in the operation of the 
system and a just and considerate attitude on the part of the 
exchanges to the interest and rights of all, whether members thereof 
or not, who are concerned with the commodity which is the subject 
of trading therein. A future contract that is unfair in its terms. 



22 



and rules that give either party to the contract an opportunity to 
manipulate the value of the same, constitutes an evil which greatly 
impairs the benefits of the system, and should not be tolerated. 
An exchange which assumes the attitude that it is a private cor- 
poration and that the dominant element of the membership have 
the right to conduct their business in their own way, for their own 
profit and regardless of the rights and interest of other members 
and of outside parties, is an evil-breeding element in the body 
economic which should be castigated into a proper disposition or 
else eradicated from a system which it degrades. We shall 
earnestly endeavor by appeals to the reason of our readers to em- 
phasize the great importance of properly organized and conducted 
exchanges, and the indispensable function of a properly regu- 
lated system of future trading; but we are no less determined 
to bring into bold review the delinquencies of men and institutions 
and the drawbacks which militate against the best interests of the 
cotton trade. It is only by a proper appreciation of the good and 
an adequate understanding of the evils, that we shall be able to 
arrive at a conclusion which will enable us to preserve the one and 
destroy the other. An intimate knowledge of the healthful func- 
tions of the body and of the distempers to which it is subject is 
equally necessary, if we would conserve the one and cure the other, 
or if we Avould avoid wrecking the organic constitution by a 
hungling and brutal attack upon a local disorder. 



23 



CHAPTER IV. 



The Application of Future Contract Trading to Spot 
Transactions. 



The spectacular and offensive incidents of future contract 
trading are generally known and widely advertised; but the normal 
operation thereof, and the indispensable part that such trading plays 
in the necessary machinery of modern spot business, has not been 
to any extent exploited; with the result that the real significance 
of the system is by the general public, and even by the majority of 
-cotton people themselves, either dimly appreciated or utterly mis- 
understood. The reason for this ex parte distribution of information 
and the explanation of this lop-sided status, is at hand. We pay 
little heed to the normal, every day operation of either economic or 
natural laws or systems; and are dependent upon exceptional and 
untoward developments in order that our attention may be directed 
thereto. We accept the even dispensation of sunshine and rain, and 
the customary revolutions of the seasons, as matters of course, and 
so long as our pleasure and progress suffers no interference, we give 
no thought to the marvelous adjustment of forces from which these 
phenomena proceed. But let drought come, or flood, or let the 
summer be too hot, or the winter too cold, or let the vivid accounts 
of storm and disaster be published, and immediately our attention 
is attracted and our disapprobation of the order of things expressed. 
We know little and think little of the manifold excellencies of the 
laws of living and growing, but we are prone to magnify the 
occasional instances of miscarriage; and thus to accept the excep- 
tions, not as proof of the rule, but as the rule itself. 

So it is with economic forces, and so with the system we are 
now discussing. The farmer takes his cotton to town, sells it to 



24 



his merchant or to a cotton buyer, bnys his goods, puts his balance 
into his pocket and goes home. To him this transaction constitutes 
the whole problem of marketing. Of course, he knows in a general 
way that the buyer of the cotton must have some merchant or 
spinner with whom he has arranged to place his purchases, or else 
must be in a position to carry the same until such time as he can 
dispose of them. He knows, of course, in a general way, that the 
buyer must make arrangements to get money with which to pay for 
the cotton bought. He appreciates, if you call his attention to the 
fact, that the cotton must be shipped on a long journey by rail or 
over seas, and that pending arrival at market or destination,, 
material changes in value may occur. He knows, also, if you mention 
the matter to him, that the spinner to whom the cotton goes has 
created the necessity for it by contracting far ahead for the sale 
of the product of his mills. He must be apprised, if he thinks of 
it, that the vast forward and onward movement of the crop which 
gives him practically at all times a ready and convenient market 
for his product, is not dependent upon the haphazard and venture- 
some disposition of buyers, but upon system and business order. He 
may have been told that the growth of the multitude of interior 
markets, the multiplication of the number of cotton buyers, and the 
ability of the latter to pay at all times the highest competitive price,, 
are based upon the great protective principle of ^Tiedging,*' which 
can be securel only in the future contract markets. But so long as 
he can bring his cotton to town, sell it to his merchant or to a 
buyer, buy his goods, pocket his balance and go home, he takes it 
all as a matter of course and concerns himself not with the principles 
of the system to which he is beholden. When, however, by reason of 
some unlooked for changes in the relation of supply and demand, 
wide variations in the price of cotton occur: or-when some bold 
speculator, by anticipating such variations, executes a coup and 
amasses a fortune thereby; or when some unfortunate victim of 
weakness and folly, because of losses incurred through speculation,. 



25 

commits the crime of embezzlement or makes an end of his life; 
the spectacular facts are featured as news items by the press, and 
thus attract the attention of the public, not as isolated incidents 
of future trading-, but as the flower and fruit and comprehensive end 
of the system itself. The dramatic accidents of speculation in future 
contracts and the human casualties associated therewith, are pub- 
lished broadcast to the world; but the thousands and millions of 
bales of cotton that are each day and each year bought and sold for 
future delivery in the regular course of non-speculative business; 
and the multitudinous transactions in contracts, by means of which 
producers and merchants, and buyers, and spinners, and bankers, 
are enabled to avoid becoming speculators, and are assisted in the 
advantageous movement of the crop from field to spindle, are 
unheralded and to a great extent unknown. Thus becomes obvious 
the truth of our former saying that we pay little heed to the normal 
operation of either economic or natural laws, but attend to excep- 
tional adverse developments. We are prone to judge an economic 
system, as well as a natural one, not by the routine benefits of 
operation, but by the occasional incidents of miscarriage. "V\niile 
it is no part of our purpose to defend or excuse what is reprehensible 
in future trading, yet we conceive that it is not only just but neces- 
sary for our common good, that the nomial and indispensable work- 
ings of the system should be explained and emphasized. 

HOW THE SPI^^EE USES THE FUTUEE CONTEACT 
MAEKET : THE BENEFITS OF SUCH USE. 

In a former article we showed how contracts were bought and 
sold and how the protective benefits of these contracts might be 
secured. We will now show just how the buyers and sellers and 
spinners of actual cotton do avail themselves of this protection, and 
will point out some of the important results that flow therefrom. 

The manufacturer constitutes the ultimate market for raw cotton^ 
The more business there is for the mills, the greater will be the. 



26 

demand for cotton ; and the greater such demand^ the higher will be- 
the price paid for the raw material. The spinner enlarges his busi- 
ness and increases the output of his mills and the consumption of 
the same, by soliciting orders for his product. He^ either by 
representatives or through advertisement, traverses his own country 
and invades foreign lands, thereby creating a wider market for 
cotton goods and new uses for the raw material. In order that the 
•spinner may thus extend his business, and sell the output of his 
mills in advance, he must be in a position to make contracts with 
the merchants whose attention he secures. He must be able to 
name a price at which he can supply the future wants of such mer- 
chants ; as, otherwise, the latter would not know what, or how much, 
lie could afford to buy. But the spinner cannot make this price in 
.advance, unless he knows what it will cost him to get the cotton 
which he must spin into cloth to fill the merchant's order. If 
he did not know this cost, he either could not make the contract 
with the merchant at all, or else he would name a price for the 
goods high enough to protect him against any supposable advance 
in the price of the raw material which he must subsequently procure. 
In the first case the great forward business between spinner and 
merchant would be rendered impossible; and in the other case, it 
would be materially curtailed by the high price the spinner must 
name in order to cover the speculative risk entailed. The great 
forward business between merchant and spinner, which provides 
future employment for the mills and creates a demand for raw 
cotton long before it is produced, is, therefore, dependent upon the 
ability of the spinner to accurately apprise himself of the future 
cost of his supplies and to assure himself that he will be able to 
make his purchases on the ascertained basis. The spinner is able 
to secure this necessary information and protection in the future 
contract markets, and in no other way : and if he was deprived of 
this facility, all his calculations would run awry and the great 
ultimate market for the farmer's product would be contracted and 



consumption curtailed. Let us seek a practical illustration of how 
the spinner avails himself of this important trade agency. 

The spinner, let us say, solicits orders from the cloth mer- 
chant — either in domestic centers of consumption or perhaps in 
far-away China or Japan — to supply the wants of the latter for 
a long period ahead. The cotton which the spinner proposes to 
use for the order has probably not been planted. The merchant 
asks the price at which the spinner will deliver the goods at the 
time stated. The spinner consults the quotations in the future 
markets for the several future months and finds that he can buy 
contracts for the desired amount of cotton at certain figures. To 
these figures he adds the cost of manufacture, the expense, etc., 
.and his profit, and names the resultant price to the merchant. 
When the contract between the spinner and the merchant is closed, 
the former gives his broker an order to buy for his account so 
many bales of cotton for future delivery. When these contracts 
.are bought, the spinner is protected in his contract with the mer- 
chant. It makes no difference to either what the market for cotton 
may do in the meantime, the merchant gets his cloth at the price 
stated, and the spinner will manufacture the cloth and realize the 
profit upon which he had calculated. As the spinner needs the cotton 
for his contract with the cloth merchant, he generally goes into 
the spot market and buys. He does this, instead of taking delivery 
on the future contract, because it may be more convenient for him 
to buy at or near his home instead of at the place where the future 
contract must be performed; and for the additional reason that, 
by going into the spot market, he can make a selection of the 
exact grades and particular staples desired. When the spinner has 
bought the spot cotton mentioned, he has no further use for the 
future contract, as it has completed its mission of insurance. He, 
therefore, instructs his broker to sell the contract, or, in other 
words, to get some one to take his place as the purchaser or re- 
ceiver. The broker sells the contract to some one who wants the 
cotton at the time specified, or to some other spinner who is in 



28 

need of the same protection as the first mentioned, or to some 
trader who is willing to buy because he believes that the price of 
cotton will advance. 

The importance of the hedging function of future contract 
trading which the spinner employs, not only directly to the spin- 
ner's business^ but to the profit of producer and consumer alike, 
cannot be fully appreciated unless we consider what would be the 
situation if such trading was prohibited. In such case the spinner 
would be placed in a position where he could not contract to sell 
his goods until such time as he had the cotton for the manufacture 
thereof actually in hand. This would not only curtail his business, 
and in consequence decrease the consumptive demand^ but would 
put the spinner under the necessity of carrying large and cumber- 
some stocks. This necessity would make his raw material cost 
him more and would decrease the price that he or his agent could 
pay the farmer. Or, if the spinner, being of an enterpris- 
ing . disposition, undertook to make forward contracts with the 
cloth merchant, in spite of the fact that he could not hedge or 
protect such contracts by purchas.es in the future market, the 
result would be a distinct disadvantage to all concerned. Either 
the spinner would be obliged to take a speculative risk which 
eventually would end in his undoing, or else he would have to 
name a price for his cloth on future delivery which, if it did not 
discourage the merchant from accepting, would necessarily curtail 
the demand for raw cotton and increase the price of cotton goods 
to the ultimate consumer or wearer thereof. From all this it will 
appear that the effect of future contract trading as it is applied 
by the spinner to his business, is to broaden and increase the con- 
sumption of cotton, to make a wider market and a better price for 
the producer, and at the same time decrease the cost of the manu- 
factured cloth to the farmer and all other users of cotton goods. 

Thus the farmer who comes to town, sells his cotton, buys his 
goods, pockets his balance and goes home, is dependent for his 



29 

market and for his prices to a much greater extent than he appre- 
ciates, upon the system of trade which enables the spinners of the 
world to increase their consumption of cotton and at the same time 
permits them to place their manufactured product upon the market 
at a price which does not include the speculative margin which they 
would have to retain and which the ultimate consumer would have 
to pay, if the protection of this system was not to be secured. 
But this is only one phase of the practical utilization of the 
future contract in the complex system of modern trade. There is 
another phase, which has a more direct and intimate relation to 
the actual markets the producer finds for his cotton and to the 
price he obtains therefor." The discussion of this branch of the 
subject will appear in another issue, and will show how the cotton 
buyer uses the future contract as a protection against the specula- 
tive risk otherwise incident to his purchases, and how this protec- 
tion tends to multiply the number of buyers, to stimulate com- 
petition, and finally to give the producer more numerous, more con- 
venient and better markets, and higher prices for his product. 



/ 



30 



CHAPTER V. 



Further Discussion of Application of Future Contract Trading 
to Spot Transactions. 



In the preceding article we "undertook to sliow the dependence 
of the spinner upon the hedging, or protective,^ function of fntnre 
contract trading; and we discussed the important relation of this 
usage to the spinners' business directly, and indirectly, to the cotton 
producers' and consumers' markets. 

We will now endeavor to explain that relation of future con- 
tract trading which more obviously and directly affects the pro- 
ducers' markets, but which none the less vitally, although in- 
directly, furthers the profitable and economic operation of the 
manufacturing industry and contributes to the profit of the ultimate 
consumer or wearer of cotton goods. Eeference is here made to 
the use of the protective agency of the future contract by the buyers 
of spot cotton, who obviously constitute the direct source of de- 
mand, and supply the primary markets for the farmer's product. 

When we have thus considered the practical benefit of future 
trading from the spinner's standpoint, as the same affects him 
directly, and the producer and consumer collaterally : and when 
we have considered the practical benefits of such trading as the 
same affects the buyer's ability to make actual purchases from the 
farmer and to carry the same, and to supply the spinner in accord- 
ance with the latter's needs, we will have some conception of the 
complex system by which, in modern times, the crop is moved and 
distributed, some understanding of the integral and essential part 
that future trading plays in such system, and some appreciation of 
the disturbance, disorder and loss that would follow the summary 
elimination of such trading therefrom. 



31 

NECESSITY FOR MANY MARKETS AND NUMEROUS 
SPOT BUYERS. 

It is a well-noted fact that the bulk of the cotton crop passes 
from the farmers^ hands during the period of three or four months. 
This supply ordinarily suffices for the needs of the mills during 
the entire twelve months. The farmer markets his crop within a 
brief period; the spinner takes a very much longer period for 
working this crop into cloth. If, therefore, there were no buyers 
in, the market other than the spinner or the actual manufacturer 
of cotton, one of two results would follow : either the spinner would 
be obliged to buy his twelve months^ supply during the fall months 
and carry the same on storage, making requisition on his stock for 
the current needs of his mill; or else the farmer would be com- 
pelled to carry the stock and sell to the spinner only at such time 
and in such quantities as the latter required. 

If the spinner carried the stock, he would find it necessary, 
in the first place, to make arrangements for large financial accom- 
modations to enable him to pay for the cotton so bought and held; 
and, in the second place, he would be put to very considerable ex- 
pense in the items of interest, storage charges, insurance, etc., in 
order that he might keep the necessary stock on hand. In this 
event the spinner would be confronted with inevitable curtailment 
in the volume of his output, and would in addition, if he attempted 
to sustain such condition, be put upon a choice between two alterna- 
tives : either he would have to reduce the price he could pay for 
cotton to a figure which would reimburse him for his additional 
expense and risk as above noted, or else he would refuse to buy more 
than his current needs, thereby forcing upon the farmer the neces- 
sity of carrying the stocks, with all the expense and risk incident 
to such custody. In either case the burden would fall upon the 
farmer. In a contest between the spinner and the farmer, without 
the intervention of any third factor, it is perfectly obvious that the 
spinner, on account of his more compact and powerful organization. 



32 

and larger financial resources, would prove the stronger. In such 
case, therefore, we can conclude with entire certainty that the 
spinner would adopt the policy of graduating his purchases to his 
current needs, and force the farmer into the assumj^tion of the 
burden which the stronger party had declined. 

The burden thus falling upon the farmer, let us see what he 
would do, if there were no buyers in the market other than the 
spinner. He, like the spinner in the preceding analysis, would find 
himself confronted by two alternatives, bitt unlike the spinner, he 
would find no happy issue out of either. He would either have to 
store, finance and insure the stock at his own expense and risk, 
pending the call of the spinner; or else he would have to offer his 
cotton down and down until the bargain basis was reached at which 
the spinner would be induced to buy and assume the expense and 
risk aforesaid. In either case the farmer would be the loser, and 
his unfortunate position would be aggravated bv the fact that he 
would again, unlike the spinner, have no one upon whom to shift 
the burden. 

If the farmer had large credit, inexpensive storage and insur- 
ance facilities, and was able to borrow money at low interest rates, 
he might be able to carry his crop and distribute it gradually and 
profitably, but. tmfortunately, under present conditions, he is not 
so equipped. Even a superficial knowledge of the situation wotild 
lead us to the conclusion that if there were no buyers but the 
spinners, the farmer would be under the necessity of offering his 
cotton down until a price was reached which the spinner was willing 
to pay: or in other words, the spinner would dictate the price at 
which the farmer would sell his crop. All of which proves with the 
unerring certainty of a logical demonstration, that the salvation 
of the producer depends upon the presence in the market of some 
buying power independent of the spinner and intermediate between 
the latter and himself. 

Fortunately, there are in the market other buyers than the 
spinners, or those who actually use cotton as manufacturers. In 



33 

the evolution of the cotton trade there have become established, in 
addition to the larger port markets, hundreds and thousands of 
smaller markets scattered throughout the interior of the entire 
Cotton Belt, and each of these markets is supplied with its quota 
of buyers. These buyers do not themselves manufacture cotton, 
but stand between the producer and the spinner, buying from the 
former when he wants to sell, and selling to the latter when he 
wants to buy. It thus falls out that when the farmer hauls his 
cotton to town, he will there find buyers ready to make him bids. 
He is, therefore, relieved from the necessity of carrying his crop, 
or else of sacrificing it at the spinner's dictation; and if his town 
happens to be in communication "w^ith one of the great exchanges of 
the country, he knows what cotton is worth throughout the world, 
and is in a position to demand value therefor. 

FUTUEE TEADIXCt AS A FACTOR IX THE EXISTENCE: 

OF INTEEIOE MAEKETS AXD COMPETITIVE 

BUYIXCt. 

It cannot be denied that the greater the number of primary 
markets there are, the more advantageous will be the situation of 
the farmer; nor can it be questioned that the larger the number of 
buyers and the more active the competition, the better will be the 
price paid the farmer for his cotton. Any system, therefore, which 
tends to increase the number of markets and buyers, is valuable; 
and if such system makes possible the existence of numerous, 
markets, otherwise impossible; and makes feasible the activities 
of a multitude of buyers, otherwise unfeasible, then such system 
becomes invaluable. The farmers of the South have no more vital 
issue confronting them than the preservation and improvement of 
their markets and the multiplication of the sources of demand for 
their cotton. 

It is pertinent here to note that the evolution of the small 
interior market and the growth of the competitive buying force, 
have been co-incident with the development and utilization of the 



34 

protective functions of ftiture contract trading. It is also a fact 
worthy of attention that the era of high prices for cotton has been 
contemporaneous with the period of increased activity in the future 
markets. These co-incidenceS; although striking, prove nothing 
unless it can be shown that the relation between future trading and 
the important facts mentioned is sequent. Here again, appeal must 
be made to the relevant evidence supplied by flie spot transactions 
of the buyers and sellers in the markets described. We have here- 
tofore made the statement that without the protoctive hedge afforded 
by the future market, the spinner could not project his activities 
into the future, and, by contracting hi$ output aihead, enlarge the 
requirements of his mills, and in consequence increase the con- 
sumptive demand for cotton and add to the value thereof; and we 
endeavored to demonstrate the truth of this statement by showing 
just how the spinner used the future market for the hedging pur- 
pose, and by pointing out the logical effect of such use in practical 
cases. We now make the statement that the small spot buyer is 
enabled to compete with the larger: that the multitude of markets 
and buyers is developed: that the producer is relieved from the 
pressure of supply: and that the higher level of prices is main- 
tained, through the instrumentality of the hedging function of 
future trading. In support of this statement we will show how 
spot purchases and sales are protected and encouraged by the use 
of the future contract hedge and describe the practical detail of 
such transactions. 

HOW THE SPOT BUYEE USES THE FrTirRE COXTEACT 
MAEKET : BENEFITS OF SUCH USE. 

We will take first the case of a spot buyer who has an oppor- 
tunity to contract with a spinner to deliver to the latter at a future 
time a certain number of bales of cotton of specific grades and 
staple. The buyer, we will say. has not the cotton in hand at the 
time, and perhaps the cotton with which he would fill such con- 
tract has not been made. If he could not protect himself, he either 



35 

would not make the contract with the spinner^, or else he would 
name a price which in his opinion would be high enough to protect 
him against an}^ supposable advance in the market before he could 
buy. In the latter case the price named would probably discourage 
th^ spinner and result in failure to contract, or else the buyer 
would become a speculator on the market. But observe the differ- 
ence when the buyer has the advantage of a future contract market. 
He looks to see at what figure he could buy contracts for future 
delivery, and to this price he would add only his commission, or 
profit, and name the resultant figure to the spinner. When the 
offer was accepted, the said buyer would at once instruct his broker 
to buy a future contract for a sufficient number of bales to protect 
his obligation with the spinner. When this was done it would 
make no differonce to the buyer how much the market might 
advance before he could buy his spot cotton: he would be protected 
by his future hedge. Thus a forward demand would be created 
for the actual cotton. When the farmer finally breught his cotton 
to town he would find the buyer waiting for him and prepared 
to pay the highest market price justified by the law of supply and 
demand. As soon as the buyer purchased the spot cotton, the need 
of the hedge would terminate, and he would, therefore, instruct his 
broker to sell his contracts, or in other words, to get some one 
else to take his place as purchaser therein. The broker would make 
this sale, or transfer, to some other buyer or spinner who needed 
the protection which the first buyer had enjoyed, or to some trader 
who believed that the price of cotton would advance. 

Or consider the situation during the fall months when the 
movement from the fields is heavy and cotton is coming to market 
ov«er every road. The buyer, we will assume, has filled all orders in 
hand and in so far as his contracts are concerned, has no need 
for cotton. If in such case he did not have the facility of hedging 
in the future market, he would not buy at all, or else would offer 
the farmer a price low enough to protect him, the buyer, from any 
supposable decline that might occur between the time he made the 



36 

purchase and the time he could place the cotton with the mills. 
The situation of the farmer would, therefore, be that either he 
would find no market at all at such times, or else he would have 
to sell at a price low enough to induce the buyer to take a specula- 
tive venture. But observe the difference wrought by the fact of a 
future market, in which the buyer could hedge any purchases he 
might make. The buyer, in the situation mentioned, would look 
at the prices at which future contracts were being bought and sold : 
from this figure he would deduct his commission, or profit, and 
the resultant price would be what he could afford to bid the farmer. 
If the offere was accepted the buyer would immediately instruct 
his broker to sell contracts for a sufficient number of bales to cover 
his purchase; and thereafter it would make no difference how 
much the market declined he would still be sure of his profit or 
commission. When in the course of business the spinner came into 
the market again, the buyer in question would sell his spot hold- 
ings at the current spot price, and then he would buy in his con- 
tract, or in other words, find some other spot holder or spinner 
who desired the protection he wished to relinquish, or some trader 
who thought prices would decline, to take his position and assume 
his obligation in the future contract. 

Multiply the two foregoing typical transactions by the many 
of the same kind that these two buyers would probably effect: and 
multiply these two buyers by the many thousands who operate upon 
this protected basis and make their commission or profit without 
any risk of loss : and then the reason why there are manifold markets 
and a multitude of buyers, becomes strikingly obvious. The corollary 
of this proposition is equally plain. Take away the protection upon 
which the Iniyers and markets depend and the number of both and 
the activity of competition will be seriously if not hopelessly cur- 
tailed and impaired. 

The foregoing transactions represent typical instances of the 
application of future contract trading to the spot transactions by 
which the crop is marketed and moved. We shall have a few more 



37 

observations to make concerning the general phases of the pro- 
tective system of hedging and its fundamental importance, and 
then we will consider the no less momentous question of the misuse 
and abuses of future contract trading which have earned the con- 
demnation of all right-thinking and right-acting people. 



38 

CHAPTER VI. 

Protective Function of the Future Contract. 



Ownership involves risk. All personal possessions are subject 
to destniction or damage. Fire, water, accidents and elemental 
disturbances incessantiy threaten property. A man's possessions, 
whether thev be great or small — whether they constitute the valuable 
accumulations of the rich or the meager holdings o^ the poor — may 
in a night be reduced to ashes and dissipated in smoke, or in an 
hour flattened to the earth by wind and storm. The effort of 
property-holders in all times has been to minimize this risk and 
protect themselves against the consequences of this inherent 
peril. Precaution is an important element in this undertaking, but 
more is needed. Precaution may lessen the chance of mishap, but 

it does not obviate the fact of loss. In order that the value of a 

* 
commodity or thing may be maintained at the maximum, the owner 

must be protected against these risks of ownership. The essential 
value of this protection lies not so much in the expectation or assur- 
ance that the owner will take care of his property, as in the fact 
that if it is damaged or destroyed he will be reimbursed. The 
extent to which this protection may be secured affects the value of 
all property subject thereto. The more complete this protection, 
the greater will be the value of the property covered thereby. What 
is here asserted concerning the thing protected, is also true of the 
contracts that relate thereto. Hence, the value of destructible 
possession, whether considered from the standpoint of utility to 
the owner or as an item for sale, or hypothecation as collateral to a 
loan, is enhanced by this protection. This indemnifying principle 
is called insurance; and the agencies which assume the risks that 
would otherwise be borne by the owner, and which, in effect, make 
indestructible the possession insured, thereby causing ownership to 



39 

be more profitable and adding value to the thing owned, are called 
insurers, or in business parlance, underwriting associations or 
insurance companies. 

IXSUEANCE. 

It is impossible to estimate the value of the insurance prin- 
ciple. It is inextricably interwoven with the fabric of all modern 
industrial, commercial and domestic life. Its application is un- 
limited and its scope universal. Eich and poor are beholden 
to this protective agency; and great and small share alike in its 
benefits. Insurance protects the prosperous and rehabilitates the 
unfortunate. It is equally essential to the business of the small 
storekeeper and to the operations of the greatest merchant. It is 
at once the conservator of values and the basis of credit. It is more : 
it is the great economic equalizer — the foundation upon which the 
commercial democracy is built. If the insurance principle were 
eliminated, not only would acute shrinkage occur in the value of 
all presently insurable commodities, and not only would the business 
of the country be disorganized, but the poor man and the small 
merchant would be driven to the wall, because only the rich and 
strong could afford, themselves, to assume the risk that goes with 
ownership of property and follows traffic therein. Although the 
undertaking of the underwriters, or insurers, is essentially specula- 
tive in its nature, and although there are instances in which some 
insurance policies do not in fact supply the protection they pur- 
port to give, still it would be a rash man, and a foolish one, who 
would, for these reasons, declare against the principle of insurance, 
prohibit all underwriters from assuming risks, and deprive mankind 
of one of its mosit enlightened, compreher/?ive and beneficent 
economic forces. 

INSUEANCE AGAINST PHYSICAL LOSS OE DAMAGE. 

In order that we may give the foregoing generalizations some 
concrete application, let us consider how the insurance principle 
affects cotton and the traffic therein. 



40 

Almost from the time the cotton is made to the time it is spun 
into cloth it is continuously covered by policies of fire or marine 
insurance. Usually this protection is applied as soon as the wagon 
deposits its load of seed cotton at the gin: always the cotton is 
covered while in the hands of the buyer or merchant or spinner, 
whether stored in warehouse or in course of transportation by rail 
or boat or steamship. The importance of this protection both to 
buyer and seller can hardly be estimated. As soon as the buyer 
purchases the cotton he takes out a policy of insurance thereon. 
Indeed if he did not he probably could not buy cotton at all, because 
the banks would not let him have the money with which to finance 
his purchases. The banks would not be willing to advance money 
on collaterals which might in a few hours be totally destroyed. 
Similar conditions would surround the cotton as it passed from 
owne^ to owner on its way to the spindles. If the buyer could not 
insure his cotton against destmction or damage by fire or water, 
he would be obliged to carry the risk himself. In such case he 
would estimate what this risk would probably cost him and deduct 
this amount from the price he offered for the cotton : thus the 
burden of this risk would fall upon the producer, and he would 
pay for it in the reduced price that he realized for his cotton. The 
risk to the individual buyer of small or average means is much 
greater than it would be to the great insurance companies, with 
their innumerable sources of recoupment, hence the amount 
reserved by such buyers would be largely in excess of the premiums 
charged by the insurance companies. 

But this is assuming that the buyers would be able themselves 
to carry the risk. As a matter of fact, the great majority of buyers 
would not be so able. The majority of buyers are able to do 
business because they can insure, and if they could not insure they 
would be forced out of business. The banks will lend money on 
cotton without any additional collateral, provided that the cotton 
is insured aga'nst loss, but without such insurance they will require 



.41 

that the borrower be able to respond out of his collateral means 
to cover any loss that might occur. This would eliminate all buyers 
from the market except the few whose credit was such that they 
could borrow without regard to the value of the cotton collateral 
in hand. Inasmuch as the crop is practically moved on borrowed 
capital, the elimination of insurance would drive out of business 
the buyers of small or limited means and would turn the business 
to the hands of a few great concerns or corporations which were 
strong enough to carry the risk. Thus the producer would not only 
be deprived of the high-price basis established by a multitude of 
buyers in active competition, but he would be compelled to accept 
the low price fixed by an assured non-competitive combination, and 
would in addition be required by such combination to underwrite 
the fire and marine risks as heretofore explained. There is no 
more important factor in all the economy of trade than this insur- 
ance principle. It is directly instrumental in broadening the 
market for cotton, increasing the value thereof and establishing 
the maximum price justified by the relation of supply and demand. 

INSUEANCE AGAINST FLUCTUATIONS IN VALUE. 

It may seem that we have entered with unnecessary particu- 
larity into the analysis and discussion of the function and benefits 
of protective insurance. It is all so obvious and customary, some 
may sa}^, that reiteration is unnecessary and tedious. x\t the risk 
of this criticism we are determined to emphasize the importance 
of the protective function of ordinary insurance, because the pro- 
tective function of future contract trading is identical in principle 
with that of ordinary insurance, differing therefrom only in extent 
or degree : and we have taken pains to set out the reasons why or- 
dinary insurance is beneficial and essential, in order that the claim 
of special protection supplied by future contract trading may be 
tested by the logical precepts in the first case laid down. 

Fire and marine insurance protects the owner of cotton from 



42 

the risk of physical destruction of his property^ or damage thereto. 
But the physical hazard hy no means comprehends all the risk in- 
volved. The valne of cotton and the status of contracts relating to 
the ownership thereof, are affected hy fluctuations in price. 
Frequent and perhaps material fluctuations in the price of cotton 
are natural and logical. The comprehensive character of 
the demand for cotton makes such variations inevitable. Cotton 
is a world-desired and a world-used commodity and the world it- 
self is the field upon which is waged the contest between the forces 
of supply and demand. Drought in Texas, too much rain in the 
Mississippi A^alley, frost in Georgia, financial stringency in New 
York, labor troubles in Manchester, war in Eussia, dynastic trem- 
blings in China, crop failure in Egypt or India, and innumerable 
other contingencies all affect the value of cotton and produce 
quickly responsive changes in the price thereof. The risk of fluc- 
tuation in price is just as obvious and real as the risk of loss or 
damage by fire or water, and is of very much larger significance. 
.Comparativel}^, only a few bales are reached by physical mishap or 
disaster, but price fluctuations affect every bale and pound of cotton 
in existence. If it be important for the stability of trade condi- 
tions and for the maintenance of competitive demaod, that own- 
ers and holders of cotton shall be protected from loss by fire and 
water; how much more important is it, for these considerations, 
that such owners and holders should be protected from loss by 
reason of fluctuatione in price? 

Fire or marine policies may be purchased from insurance 
companies whose business it is, for a consideration, to assume 
such risks. There are no insurance companies, as such, which un- 
derwrite the risks incident to price variations; but this invaluable 
protection can be secured and is secured to an unlimited extent 
and on easy terms, during every hour of eYery business day and 
by any one who desires or needs the same. This insurance is avail- 
able in the future contract markets and nowhere else, and this 



43 

protection is available for commodities for which there is a future 
contract market^ and for none other. In former articles we have 
shown just how the succesive owners of cotton are affected by these 
price fluctuations; and Have pointed out the exact method by which 
they may obtain the required insurance, through the purchase and 
sale and transfer of valid and binding contracts under the auspices 
of legitimate .Exchanges. Thus becomes apparent the momentous 
consequence of the protective function of the future contract, and 
with this appreciation comes conviction of the solemn duty of the 
Exchanges to administer this function in equity and honesty. The 
better we understand the far-reaching benefits of this protective 
principle the more appalling appears the consequences of undig- 
criminating assaults upon the system through which these benefits 
are secured; and the better we appreciate the indispensable agency 
of this system in the desired result, the more determined should we 
be to rid it of its weaknesses and contribute to its strength. 



44 



CHAPTER VII. 



In Reference to United States Government Report on Cotton 

Exchanges. 



i 



In the preceding articles we hare discussed the nature and 
functions of a legitimate Exchange, as differentiated from the 
bucket shop : the nature of the ftiture contract and methods of trad- 
ing therein: the application of future trading to spot transactions; 
and finally the protective or insurance value of the future contract 
system. By statement of fact, hy analysis, and by deduction, we 
have endeavored to show tliat the properly organized and regulated 
Exchange is an essentially beneficial institution; that the future 
contract sanctioned and utilized in such Exchange is an honest, 
valid and binding trade obligation; and that the trading on such 
Exchange, in such contract, supplies the means whereby specula- 
tion in spot transactions may l>e avoided through the medium of 
the hedging facility thereof, to the direct and indirect, immediate 
and ultimate advantage of buyer and spinner, producer and con- 
:sumer. and of the cotton trade at large. 

We have bv no means exhausted the catalo^^iie of benefits 
•conferred by a fairly regulated system of future trading : we have 
n^ierely stated the fundamental principles and cited the typical 
instances of the operation thereof. But we will not prolong the 
'discussion of this favorable phase of the system beyond the limits 
•of this article. We have, we hope, established the fundamental 
merit of the system. 1jut before proceeding to the analysis of the 
nntoward features of the same and to the discussion of the remedies 
therefor, we think it well to cite some expert and disinterested 
authority in support of our conclusions. 

Under a resolution adopted by the House of Eepresentatives in 
February 190?, the Department of Commerce and Labor, through 



45 

the Bureau of Corporations, was directed to make an investigation 
of the Cotton Exchanges dealing in future contracts. 

The Commissioner of said Bureau, Hon. Herbert Knox Smith, 
conducted during a period of more than two j^ears a searching 
investigation, and issued a report setting forth the facts developed, 
and his conclusions therefrom. This report is one of the most 
comprehensive and luminous economic treatises of modern times, 
and will well repay the study of all who desire full and accurate 
knowledge of this important subject. The report discusses not only 
the evil developments of future trading, and the remedies therefor, 
but also takes notice of the benfits thereof. 

:>^ATUEE OF COTTON EXCHAXGES. 

Under this head, Commissioner Smith, in Part 1, of the 
report, pages 56-57, says : 

"It should be clearly understood that whilst most of thes^ 
"cotton exchang-es are corporations they are not engaged as such in 
"the cotton business in any way. Instead, they are mere associations 
"of individuals who in their financial operations are free to a^t 
"as they like, subject to the general regulations of the exchange. 
"Exchanges as such do not buy or sell cotton, and, except that 
"occasionally some exchange derive a small income from fees for 
"the inspection or grading of cotton, they have no direct financial 
"interest in the product itself. Their income is derived from mem- 
"bership dues, rents of buildings, investments, or similar sources. 
"This characteristic of cotton exchanges should be clearly 
"appreciated. The impression which appears to exist in some 
"quarters that exchanges in their corporate capacity act as a unit 
"in the cotton market is altogether erroneous. Market operations, 
"in cotton are wholly matters of individual concern. Moreover,, 
"the individual members of exchanges, instead of having a com- 
"mon interest and acting as a unit, ordinarily have market interests: 
"of the most diverse and conflict'ng character. It is true that fronn 
"time to time certain members of exchanges act in unison by 



4r> 

"means of -so-called cliques or pools, but it is entirely safe to say 
"that it has never happened that such cliques have included the 
"entire membership of an exchange. The idea that all the members 
"of an exchange are banded together as a unit to prey upon the 
"outside trader is not well founded. Outsiders have undoubtedly 
^^suffered from the co-operative efforts of certain members of 
"exchanges to manipulate prices, but such concerted manipulation 
"is not conducted by an exchange, as such or by all the members 
"acting together. Unjust rules, it is true, may have been adopted 
"from time to time by exchanges in their official capacity, but this 
"is a matter distinct from actual financial dealings in cotton, and 
"one with which this report deals at some length."^ 

BINDIXG XATUEE OF FUTUEE COXTEACTS. 

In support of our conclusions under the above head, we quote 
Mr. Smith, Part 1, pages 43-44 : 

"In the first place, a future contract is, as its name implies, 
"a definite agreement on the part of one party to deliver to another 
"part\', who in turn agrees to receive, a certain quantity of mer- 
"chandise within a fixed period of time at a fixed price. While 
"such contracts when first made are usually confirmed merely by 
"word, or even by a sign, such as the uplifting of a finger or a 
"nod of the head, they are later recorded, either in full or in the 
"form of a memorandum of the same force and effect and are 
"absolutely binding upon the parties entering into them. The seller 
"of such a contract is absolutely liable for the delivery, and if 
"called upon for such delivery by the buyer he can in no way avoid 
"compliance with terms of his contract except under unusual 
"conditions especially provided for. Failure to make such delivery 
"will subject him, in all probability, to suspension, at least tem- 
"porarily, from the exchange with which he is connected, and render 
"him liable to legal action on the part of the purchaser. In actual 
"practice it is undoul^tedly true that a large number, and probably 
"a considerable majority, of buyers of future contracts on the 



47 

"leading exchanges do not desire the delivery of actual cotton, and 
"that a majority of sellers, on the other hand, do not contemplate 
"making such physical delivery. Such a buyer of a contract instead 
"of receiving the actual cotton sells out his contract to another 
"party, or perhaps to the very man from whom he originally bought 
"it. In other words, instead of taking the cotton he merely gains 
"or loses the difference between the price at which he bought his 
"contract and the price at which he sells it out. The second buyer, 
"in turn, may have bought the contract with the same speculative 
"intent, and, instead of receiving actual cotton, may likewise sell 
"out the contract at any time prior to the date of maturity. 
"Eventually, hoAvever, since the contract has a fixed date of 
"maturity, the ultimate purchaser must, at the stated time of 
"delivery, receive the actual cotton — ^^and this whether he desires 
"to or not. When the time for making delivery has expired, he 
"cannot sell out his contract. This fact and the fact that any 
"buyer, from the first to the last, can, if he chooses, hold his 
"contract and compel the seller to deliver the actual cotton when 
"the date of maturity arrives give trading in futures a character 
"entirely different, in principle at least, from that of a mere wager 
"or bet.'' 

EXTENT OF HEDGING OPEEATIONS. 

In a former article we explained the apparent excess of future 
trades over the total supply of spot cotton. Commissioner Smith 
sustains our contention, in the following extract from his report, 
Part ly, page 268 : 

"The same cotton may be hedged over and over again by 
"different parties, thus counting several times in the total of 
"hedging transactions. In the first place, a country merchant who 
"buys cotton from growers and planters in small lots and 
"accumulates the cotton faster than he can sell it, frequently sells 
"future contracts as a hedge. The buyer of cotton from such a 
"country merchant in turn also sells a hedge, or, if he has previously 



4.8 

"sold cotton ahead to spinners, usually he has already bought a 
"hedge. The spinner likewise may employ a hedge. Still again 
"the dealer in dry goods, who buys from the spinner, may sell 
"future contracts as a hedge against a stock of cotton goods which 
"he may be carrying at a time when he anticipates a decline in its 
"value. The bulk of hedging transactions in this country, however, 
"comes from cotton merchants. Most cotton merchants regularly 
"hedge by either buying or selling future contracts, as the case 
"may be, and aim never to be long or short of actual cotton to any 
"extent. Frequently merchants endeavor to balance their accounts 
"in this respect at the close of each day. 

"The same cotton may be hedged repeatedly by a single owner. 
"Thus, a merchant buying cotton in October might sell a January 
"contract as a hedge against it; if by January he had not sold the 
"actual cotton, he could transfer his hedge to a more distant month. 
"This might be done over and over again until his cotton was 
"eventually disposed of.'' 

FUTURE SYSTEM AS A MEANS OF INSURANCE AGAINST 

RISKS OF TRANSACTIONS IN ACTUAL COTTON— 

THE HEDGING FUNCTION. 

On this important division of the subject, Mr. Smith has given 
an. exhaustive disquisition. We quote briefly from Part I, pages 
48-49 and 53-54 : 

"In using the future system to faciliate actual transactions 
"in spot cotton it is obvious, in the first place, that it may thus 
"be used by either the grower of cotton or by any other seller to 
"dispose of his cotton at a distant date by simply selling a contract 
"maturing at that date, and, when the contract matures, completing 
"the transaction by a physical delivery of his cotton thereon. Thus, 
"if, say, in November, January futures — that is, contracts for the 
"delivery of cotton in January— are comparatively high, a grower 
"or a holder of cotton may, tli rough some broker on a cotton 
".exchange, sell such January contracts, and when, the month arrives 



49 

^'^deliver or, to use the trade expression, ^tender' the actual cotton 
"against them. 

"In the same way a manufacturer of cotton goods, instead of 
"buying his entire supply at the beginning of the season, might 
"in theory distribute his purchases throughout the year by purchas- 
"ing contracts for different months through a member of a cotton 
"exchange and as the contracts mature receive actual cotton in 
"fulfillment of them. Some of the reasons why in practice this 
"system is not extensively employed by spinners in just this way 
"will be extensively discussed in a later Part of this report, 

"The above description illustrates the simplest use ®f the 
"future system. The system is employed in a quite different 
"manner, however, by buyers and sellers of actual cotton as a sort 
"of insurance against violent fluctuations in price during the period 
"between the original purchase or sale and the final delivery of the 
"product. This employment of the future system, which is 
"technically known as 'hedging' is an exceedingly important 
"feature of modern trading in cotton, and, unquestionably, an 
"extremely valuable one." 

"It is apparent from even the brief illustrations given that 
"a properly conducted future system, through this ©ppO'tunity for 
"hedging, affords a great protection to the most legitimate sort of 
"business and one of almost incalculable value. It should be noted, 
"however, that hedging does not absolutely guarantee a merchant 
"from loss, since advances or declines in the price of his future 
"contracts may not exactly correspond with advances or declines 
"in the price of spot cotton. The illustrations above given assume 
"that absolutely correct methods of conducting the future business 
"have been established. It cannot be too forcibly emphasized, there- 
"fore, that in practice it has happened at various times that hedges 
"have afforded a far less perfect measure of protection than above 
"indicated. This situation really constitutes one of, the most 
""important matters discussed in this report, and cannot be entered 
'^'into extensively in this preliminary chapter. The hedging process 



50 

"has been explained mainly to sliow that tlie future system is 
"something more than a device for mere speculation, and that it 
"presents "benefits of great value to those conducting business in 
"actual cotton. In fact, for these, as individuals, the future system, 
"if properly used, may be said to largely eliminate speculation. 
"ObviousW, for a merchant, without hedging, to buy 10,000, 20,000 
"or 50,000 bales of a valuable commodity like cotton, which is 
"subject to great fluctuation in price, would be a highly speculative 
"transaction, whereas,- under a perfect working of the hedging 
"system, the element of speculation can be largely avoided. This 
"opportunity for hedging is, indeed, regarded by practically all 
"cotton merchants as almost an absolute necessity under modern 
"methods of conducting business. 

"An idea of the value of the hedging function may be obtained 
"when it is stated that in Grreat Britain banks very generally refuse 
"to loan money on cotton which is not hedged. Moreover, it is 
"almost universally conceded that, since the introduction of hedg- 
"ing, failures in the cotton trade, which had previously been 
"frequent, have been materially reduced as a direct result of the 
"greater stability with which transactions in spot cotton can be 
"conducted." 

NUMBER OF BIJYEES AND COMPETITION INCEEASED 
BY FUTURE TRADING. 

We have endeavored to emphasize the fact that the protective 
function of future trading made possible the multitude of small' 
markets and operations of buyers of moderate means, and thereby 
increased the price paid the producer for his cotton. In this con- 
nection Mr. Smith, Part IV, pages 279-280, says : 

"Those who argue that the future system tends to advance the 
"price of cotton for the grower attach much weight to the fact that 
"the system, on account of the protection afforded by hedging, makes 
"it possible for men of limited means to become cotton merchants, 
"and thus to increase competition for the purchase of the product. 



51 

"It is imquestiona])ly true that the future system, in the main, 
"because of the hedging function — imperfectly as it has operated 
"at times — has made it possible for a great many men of limited 
"resources to enter the cotton l)usiness. Where years ago the busi- 
"ness of the cotton merchant was attended by tremendous risks, 
"making it almost essential that he should possess ample capital, at 
"the present time a large number of cotton ])uyers of moderate 
"resources are scattered throughout the cotton belt. It is a common 
"occurrence to find several of these buyers at a small country town 
"bidding for cotton as it is brought in from farm or plantation in 
"wagonloads of a few bales each. While competition in the cotton 
"business probably would have increased without the future system, 
"there can be no question that the opportunity for reducing 
"speculative risks afforded by the hedging function, when properly 
"safeguarded, has greatly stimulated such competition/' 

Having now outlined the essential merits of the future contract 
system and having shown its indispensable relation to the modern 
trade methods by which the cotton crop is marketed, moved and 
spun into cloth, we will in the next succeeding articles discuss the 
misuse of the system and the misbehavior of men and institutions 
with relation thereto. 



52 

CHAPTER VIII. 

Future Contract Trading — Injurious Developments Discussed. 



ia the preceding articles on Future Contract Trading we have 
endeavored to explain the system itself, to show the practical 
relation thereof to modern trade methods, and to demonstrate that 
future trading is not only an important economic agency,^ but a 
direct and powerful factor in the advancement of the material 
interests of both the producer of cotton and the consumer of cotton 
goods. In short, we have sought to demonstrate the economic value 
of future contract trading. 

In discussing this important issue we are moved by an earnest 
desire to throw light upon both sides of a much misunderstood 
problem. We want our readers, and particularly those who aje most 
vitally interested in a wise settlement of the question — namely the 
cotton farmers, — to secure a clear view of the proposition in its 
entirety. A prejudiced view of the evils, only, of the system, or an 
interested view of the good, only, will not suffice for our purpose. 
We must be apprised of both the good and the evil if we are to 
adopt a cour^ of action that will be beneficial to our own material 
interests and just to all the interests concerned. 

In the furtherance of this purpose it has seemed best to 
discuss first the benefits of future trading. Not because the 
injurious phases are unimportant, and not because we wish to 
relegate these phases to secondary consideration, but because it is 
wise to have the essential necessity of the system thoroughly 
appreciated before indignation is aroused by a recital of the flagrant 
abuses that have been practiced in its name. This was the mistake 
made in the early stages of the agitation against future contract 
.trading. Men were incensed by certain abuses and rushed blindly 
toward the annihilation of a svstem which thev did not understand, 



53 

and the good of which had not been brought to their notitee. The 
fact that we have stated the case in favor of future trading as 
strongly as possible^ while proving our conviction of the necessity 
for it^ is by no means to be taken to indicate that we are partisans of 
the system under any and all circumstances, nor that we think the 
system, as it has been operated, should be continued. On the con- 
trary, we recognize and utterly condemn the evil developments of 
the system and the wrongs that have been inflicted through the 
inequitable operation thereof; and we are as firmly committed to 
the destruction of these evils and wrongs as we are to the preserva- 
tion of the beneficial features. Indeed the more strongly we believe 
in the good that inheres in a properly operated system of future 
trading, the more implacable is our enmity against those agencies 
which debauch such system. We have exploited the good in order 
that it may be utilized and preserved; we will now point out the 
bad in order that it may be excoriated and destroyed. 

BUCKET SHOPPI:NCt. 

The conspicuous evils that have been attributed to future 
trading are three in number, to-wit: Bucket Shopping, Excessive 
Speculation- and Manipulation of Prices by Means of Unfair Rules 
and Practices in tlie ExcKomg&s. In a former article it has been 
shown that Bucket Shopping was simply and solely a gambling 
device; that its only relation to the S3'stem of future trading was 
that the bucket-shop keepers bet with their victims on the fluctua- 
tions that occurred in the value of actual contracts; and that the 
legitimate exchange and the system of future contract trading was 
no more responsible for this pernicious practise than was the ocean 
liner responsible for the bets that were made by its passengers on 
its speed and daily progress. Furthermore, the Bucket Shop is a 
specific institution and can be eradicated root and branch by direct 
legislation without any injury to the system of future contract 
trading, but with great benefit thereto. Laws have already been 
passed in all of the Southern States and in practically all the States 



54 

of the Union proMbiting Bucket Shopping, and if the practice 
prevails anywhere it is because the existing laws are not enforced. 
Excessive speculation and manipulation by the means stated are, 
therefore, the evils properly to be considered in connection with the 
system of future contract trading. 

EXCESSIVE SPECTLATIOX. 

Speculation is in itself not an evil; on the contrary, it is the 
vivifying principle of trade. If it were possible to eliminate 
speculation from all business affairs and to limit the purchase and 
sale of all commodities and things to those who had actual use for 
such commodities and tilings and those who had ceased to have use 
for the same, the value of every material asset would undergo a 
drastic shrinkage, business would revert to the ox-cart period, 
opportunity would be smothered, development halted, and the 
activities of mankind limited to a struggle for actual necessities. 

A man has a right to buy, or to contract to buy, a thing, 
whether he needs it for use or not, if he thinks it is cheap and that 
later he can dispose of it at a profit. A man has a right to sell, 
or to contract to seU, a thing, whether he has it in po^^sion or 
not, if he thinks that the price is liigh and that he can sell at a 
profit. This is speculation in its simplest form. The principle 
runs through all business transactions and cannot be avoided, even 
if avoidance was advisable. When the farmer invests his money 
and his laljor in his crop, he speculates on the seasons and on the 
[variations of supply and demand. The merchant and the banker, 
for the consideration of profit, or of interest, speculate upon the 
capacity of deJjtors or borrowers, to pay. Insurance companies for 
the sake of premiums to he earned speculate upon the risks of fire 
or water or the duration of human life. Everybody speculates. 
Speculation is an inherent condition of the business and of the 
social relation. It cannot be eradicated, no matter how hard we 
may try, and it should not be eradicated even if we had the power 
to do so. The principle of speculation is, therefore, not only ethical. 



55 

but necessary; and not onty necessary^ bnt it is the vital dynamic 
force in trade and an ineradicable inijDnlsQ of the human -race. It 
follows that the evil lies not in the principle of speculation, but in 
the manner in which the principle is employed; not in the use of 
the principle, Init in the abuse of it. 

SPECITLATIOX MUST BE EEGULATED. 

We have lieretofore shown how speculation properly regulated 
is the basis of tliat insurance upon which the cotton business 
depends. The men who l)elieve that prices will l)e higher in the 
future and Imy for future delivery, and the men who l)elieve that 
prices will he lower in the future and sell for future deliverv, are 
the people wlio assume the risk, thus enabling the great mass of 
producers, merchants, l^ankers, spinners and consumers, to conduct 
their business on non-specubitive lines to the material advantage 
■of all concerned. A properly regulated system of future trading, 
therefore, supplies the means wherehy speculation is limited to the 
few who are able and willing to take the risk and protection afforded 
to the unlimited number who are unwilling and unable to assume 
the risk. A properly regulated system of future trading thus 
■decreases the volume and extent of speculation instead of increasing 
it. Eegulation, therefore, l)ecomes the issue. 

EXCESSIVE SPECULATIOX AX IXCIDEXT. 

Future trading, per se, no uuitter how fair and honest the 
system may be, is susceptible to abuse in the matter of speculation. 
The ease and facility with which cotton may be bought for an 
advance, or sold for a decline, by the transfer of representative 
contracts; the efforts made and the inducements offered by brokers 
whose commissions or profit depend upon the volume of speculative 
business transacted; and the natural tendency of mankind to take 
a chance of making quick and easy money : all tend toward induc- 
ing people to speculate, who have no business in the market, and to- 



56 

wards making those who have a legitimate use for the contract^ 
overtrade and take long speculative chanees. There is no doubt 
but that this facility is a dano-er lurkino- in anv system 
of future trading, and there is no doubt l}ut that at 
the time the agitation against future trading began, this excessive 
speculation was a most reprehensible fact and a flagrant evil. 

But since that time nearly all of the Southern States have put 
anti-future-speculation laws on their statute books. These laws, 
while unnecessarily drastic, and while they enjoin a great deal more 
than they accomplish, still have had the effect of practically limit- 
ing future trading to those actuall}^ engaged in the cotton business 
and who have an actual need for the future contract; and have 
effectually prohibited that indscriminate mania for speculation, 
which before, had invaded all sections of the country, all lines of 
business and even the homes of the people. The evil of excessive 
speculation has been, therefore, at the present time minimized, and it 
can be controlled by the enforcement of proper regulations. 

THE CRUX OF THE EVIL. 

We have now reached the crux of our discussion. We have 
shown that the principle of future trading is necessary and bene- 
ficial; we have aflBrmed that the system as it has been operated, 
has been attended by harmful consequences; we have shown that 
one of the attributed evils, that of bucket-shopping, has no 
relation to a properly operated future trading system, and besides 
has already been largely eliminated and can be entirely destroyed; 
we have shown that another most conspicuous hurtful development 
of future trading, excessive speculation, was not a constitutional and 
inevitable consequence, but an abuse which could be, and which 
had been in recent years, kept within reasonable limits of restraint. 
There remains yet to be considered the third evil specified, or the 
evil of manipulation through unjust, unfair and corrupt methods of 
operating future contract trading. 



57 

In the next and the succeeding articles this abuse will be given 
attention. We shall find in the wrongful practices specified the 
fountain head of the trouble and the capital cause of the reproach 
that has fallen upon the future trade. We shall find that the fault 
lies not in the principle^ nor in the system of trading^ per se, but 
in unfair and dishonest methods of administering the principle 
and manipulating the system. After these several abuses have 
been pointed out and the reason for the existence and the harmful 
effect thereof discussed^ we shall endeavor to recommend the 
remedies by means of which the system may be shorn of the vices 
which have been engrafted upon it, and strengthened and perfected 
for the proper performance of its important economic purpose. 

ISSUE ILLUSTEATED. 

Because we are approaching tlie climax of our discussion, it 
is important that we have the essential issues clearly in mind, and in 
order that we may have no excuse for confusion in this regard, we 
shall, even at the expense of repetition, attempt to summarize our 
analysis by means of an illustration. 

The system of navigation plays a most important part in the 
progress and welfare of the human race. But there are both 
difficulties and dangers attendant upon the practical effort to 
navigate. These harmful contingencies may arise from two 
different causes— they may proceed from the very nature of the 
undertaking ; or from some extraneous overt interference. Of the 
first class, the happening of storms may be taken as typical; of 
the second class, piracy is an example. In order to obviate or 
resist these adverse contingencies, it is not necessary, nor wise, to 
pass laws prohibiting navigation. The remedy for the first class of 
mishap is to provide safety appliances and to enforce safe guarding 
methods ; the remedy for the second class of misfortune is to sweep 
the pirates from the sea. 

Applying tliis illustration to tlie subject in hand : 



58 

TRAXSGEESSIOX, XOT TEADIXG, SHOrLD BE 
PEOHIBITED. 

Future contract trading is a system necessary and indispensable 
to mcdern business. But tbere are certain difficulties and dangers 
Tittendant upon the practical effort to operate the system. These 
liarmful contingencies may arise either from the nature of the case 
or from the overt machinations of selfish and designing men. Of 
the first class the development of indiscriminate and excessive 
speculation may be taken as typical: of the second class, tlie cotton 
exchange which has no excuse for existence except as a speculative 
convenience, and which is operated under unjust and unjustifiable 
rules for the profit of a coterie of its members at the expense of 
the otitsider, the public, and the producer and consumer of cotton, 
is an example. To obviate and resist these adverse contingencies, 
it is neither wise nor necessary to pass laws prohiljiting all future 
contract trading. The remedy for the first contingency is to restrict 
and regulate the citizen in his conduct — wMcli has already been 
done : the remedy for the assaults of overt dishonesty, is to 
proceed against the transgressor. Subsequent discussion will be 
devoted to this latter phase. 



59 



CHAPTER IX. 



Future Gontract Trading — Further Discussion of Injurious 
Developments. 



A trade agency of sucli economic value and practical benefit 
as we have found the future contract to be^ would necessarily, if 
emplo3'ed under adequate restrictions and proper methods of opera- 
tion, command universal appreciation and endorsement. We find, 
however, that the future contract, and trading therein, has been 
assailed with vindictive bitterness and the whole system is even 
now the sul)ject of proposed prohibitory legislation pending in 
Congress. It is not to be supposed that this antagonism proceeds 
from wanton destructiveness. It, therefore, follows as a logical 
necessity that the system has not in all instances been employed 
under proper restrictions and methods. A brief analysis of the 
anti-future agitation will strengthen this conclusion. 

CAUSES' OF AXTI-FITTUEE AGITATION ANALYZED. 

The acute attention of the public Avas drawn to future trading 
and a hostile disposition aroused, several years ago by an epidemic 
of speculation in cotton which seized all classes of our people. 
Excited by press accounts of great fortunes made in a few days 
or weeks ; stimulated by the tales of easy money gained in the cotton 
market; and faciliated by the establishment of so-called cotton 
exchanges in all of the large towns and many of the small ones 
throughout the South, an injurious condition of affairs was brought 
about. Farmers, doctors, lawyers, bankers, merchants, clerks and 
even women and children caught the infection and became 
speculators in cott«n. In addition to the generally demoralizing 
effect of such conditions, particular instances of indiscretion, 
misfortuni, dishonesty and tragic consequences, still further ag- 
gravated the storm of protest. Such conditions were not tolerable, 



60 

and the people moved by swift anger struck at the trade system 
which made such developments possible, and within a brief period 
almost all the Southern States had placed upon their statute books 
the drastic anti-future laws aforementioned. 

It is probable that this tienzY of speculation would have worn 
itself out within a limited time, as experience has shown to be 
the case in similar instances of hectic disorder, but it is an un- 
deniable fact and a fortunate fact that the laws mentioned sum- 
marily hastened the desired consummation. But. although, these 
laws s«rved a good purpose, they, like all laws framed in anger and 
truculence went too far, proposed too much and did not fit the raal 
necessities of the case. They undertook to destroy the abuses of 
future trading by denying the citizen the right to trade in future 
contracts at all. They proposed to deny all men the right to 
use a necessary trade facility because some men had misused the 
same. Fortunately, those states in which the future markets were 
located did not pass the=e drastic acts, and as no prohibitory federal 
statute was enacted, the future markets were not destroyed. Thus 
it was still possible to find a market in which future contracts 
could be bought and sold; and the citizens of those states which 
had enacted such laws, whose business and livelihood required the 
protection afforded by the future contract, found ways to purchase 
their hedges in spite of the prohibition. 

If the future contract exchanges had been closed and the 
future contract markets destroyed; or even if the strict mandate 
of the state anti-future laws had been rigidly enforced and the 
cotton Iniyers and sellers of such states, had been in fact pro- 
hibited from using the future contract facility, there can be no 
doubt l)ut that the cotton business of those states and of the South 
would have been demoralized and a united protest would have 
demanded the repeal of the prohil^itory statutes. 



f)t 



OPPOSITION STILL IN" EVIDENCE. 

But, although the original cause of complaint has been to a 
great extent removed;, and although future contract markets are 
still in existence and future contracts are available to those who 
require them in the transaction of their business; still the voice 
of protest has not been hushed nor the hand of opposition stayed. 
In the agitation of the future trading question during the past 
few years and from the investigation of the subject, which has been 
instituted, the people have learned that excessive speculation and 
the demoralizing effect thereof on the individual, does not com- 
prise all the injury that has been inilicted or may be inflicted by 
a wrongful use of a system of future contract trading. They 
have learned that where the machinery of the system is in powerful, 
unscrupulous and irresponsible hands, it may be used for the selfish 
profh of the individuals controlling the same and to the detriment 
of other individuals and to the injury of the trade. The cotton 
trade has learned that the system upon which it is dependent, may 
by unfair regulations and unjust conditions be impaired in its 
beneficial function and prostituted to the greed of the framers of 
these regulations and the authors of these conditions. It has 
been ascertained l)y interested students of the problem and demon- 
strated by disinterested in^^stiglation and testimony, that one 
future market in this country has been for years and is, in the 
face of exposure and condemnation, still persisting in operating. 
under uncommercial, partial and inequitable rules and methods; 
and has been and is still maintaining and proclaming the arrogant 
assumption that the object and purpose of its organization and 
operation is the profit of its members, without consideration for 
the rights of producers, spinners, consumers or any outside interest 
whatsoever. The cotton trade has learned that the code of rules 
employed by this institution has inflicted injury upon legitimate 
interests, has brought reproach upon exchanges and even threatens 
the integrity of the great principle of future trading itself. 



62 

IXDIGi^ATIOK SHOULD I^OT GLOUD JUDGMENT. 

But we must not permit our indignation to cleucl our judg- 
ment, nor must we allow our resentment to lead us into anj 
extreme or destructive measures which will accomplish more than 
we intend or more than the cotton trade can stand. It is not only 
right, but it is necessary that future contract exchanges shall he 
required to deal fairly with the trading public, but it is neither 
right nor necessary, in order to attempt this result, to destroy 
all such exchanges or to prohibit future contract trading, either 
by specific legislative denial or by the imposition of conditions 
which will make such trading impracticable or impossible. We 
must preserve the future contract exchange and perfect the future 
contract trading system, but the exchange must admit and respect 
its obligation, and the system must be made to subserve the 
interests, not of the individual operator or clique of operators, but 
of the cotton trade. That this result may be accomplished by estab-' 
lishing a standard of rule and administration to which future 
trading must conform, or otherwise be outlawed; and by investing 
the strong arm of the government with the authority, and imposing 
upon it the duty, to see that the prescribed principles are observed 
and obeyed, is at once the remedy for the abuses and the salvation 
of this most important agency of trade. The command must be, 
not that "you shall not trade in future contracts;" but that "you 
shall not trade in future contracts through any exchange which 
does not conform to certain stated principles of equity and fair 
dealing." When the fact is appreciated that future contract 
trading cannot be carried on in sufficient volume to develop eitheii 
the good or the bad features, unless a large number of traders are 
gathered together in a market; and when it is realized that such 
future trading market cannot be organized and the necessary facili- 
ties afforded, except through the medium of an exchange : it 
becomes obvious that the enforcement of the foregoing command 
through the regulation of exchanges, will answer the imperative 



03 

demands of the legitimate trade and traders^ and will at the same 
time satisfy all reasonable protests against inequities in the opera- 
tion of the system. 

EXCHAXGES EESPOXSIBLE FOR SYSTEM OF 
OPEEATIOX. 

It being admitted that future trading to l)e effective either 
for good or had^ or to amount to enough to entitle it to notice, 
must be carried on through the medium of an organization or 
exchange ; it follows that the principles upon which, and the code 

of rules under which, such trading is conducted in such exchanges, 
become the issues of prime importance. 

We will not here attempt any detailed discussion of the 
technical rules and requirements that should govern future trans- 
actions in the exchanges. We will announce a few general prin- 
ciples, which should and must be observed, and then we shall 
show in as plain a manner as possible how in some instances these 
principles have been disregarded. In this discussion it will be 
necessary for us to call attention to the rules and practices of 
certain exchanges by name. We disclaim any prejudice or sectional 
animosity in our arra;ignment of any institution. We take the 
facts as we find them and draw our conclusions therefrom. 

FOIXTS OF DISCUSSIOX SUMMARIZED. 

For the sake of unity in the arrangement of the discussion, we 
will not in this article begin the enumeration of the general prin- 
ciples which should govern the organization of a future contract 
exchange and the operation of the system of future contract trading ; 
but will devote the entire following article to the consideration of 
this fundamental branch of the subject. 

In the meantime and in order that we may not lose the 
sequence of the argument, we will conclude this installment with 
the following summary. 



64 



1st. Future contract trading utilizes an important economic 
principle wMch is essential and indispensable to the modern cotton 
trade. The proper operation of the future contract agency supplies 
protection for all dealers in cotton, from the producers of the raw 
material to the ultimate distributors of the manufactured goods 
and makes possible the elimination of the element- of specula- 
tion from the transactions of each; thus increasing the number of 
markets and buyers for the raw material and encouraging and 
extending the cotton manufactu^-ing industry, and thereby stimulat- 
ing competition in both the buying of the raw material and the 
selling of the manufactured product, with the result that the farmer 
receives more for his product and the consumer pays less for the 
clothes he wears. Interference with this protective principle 
reverses, pro tanto, the foregoing consummation: while the prohibi- 
tion of the use of the principle would precipitate disorder and 
demoralization in modern business methods, and bring wlwlesale 
injury upon all concerned with the cotton industry. 

2nd. In the utilization of this principle, injurious develop- 
ments are evident, (a) The opportunitv which future contract 
trading ojffers for speculation may Idc abused, and men who have 
no business in the speculative market may gamble to their own liurt, 
and men who have a legitimate use for the facility may run into 
a course of reckless hazard, (b) Particular systems under which 
the principle is operated may be faulty and may l^e so organized 
and so operated as not only to impair the usefulness- of the agency, 
Imt make it, at times, an instrument of oppression to those whom 
logically it should benetit, and in instances, a disturbing and in- 
jurious element in the actual cotton trade. 

3rd. As the evil mentioned uuider sub-head (a) may attach 
itself to any system of future trading, no matter how fair the 
modus operandi might be, the remedy therefor lies primarily in the 
regulation of the conduct of the individual l)y the state. This 
regulation has been applied l^y several states l)y means of anti- 
future trading laws, which although unnecessarily drastic, are 



65 

effective for the purpose mentioned; and which, inasmuch as they 
have not destroyed the fntnre markets themselves, and have not 
in fact prevented the legitimate nse of the contract, although in 
terms prohibiting the same, have not been followed by the dis- 
astrous results which by universal application and logical enforce- 
ment they would entail. 

4th. As the evil mentioned under sub-head (b) is the result 
of a faulty system of utilizing the future trading principle, and as 
the systems, by means of which the principle is utilized, are formu- 
lated by the several exchanges in which such trading is systematized, 
the remedy for injurious developments in this regard, lies in 
establishing certain principles to which the exchanges must conform 
if they permit future trading under the rules thereof; and in order 
that conformity to these principles may be enforced, Federal 
Supervision of the operation of such exchanges, should be invoked. 



66 

CHAPTER X. 

Fundamental Principles Which Should Govern Exchanges. 



We have reached the point in our discussion where the onus 
■of proper or improper utilization of the future trading principle 
is placed fairly and squarely upon the Exchanges which formulate 
the systems under which the same is made operative. Such ex- 
changes have it within their power to enforce fair and equitable 
methods, or they can employ a code of rules and practice, unjust, 
inequitable and partisan. Whether they do the one thing or the 
other will determine whether future trading will realize the full 
benefit of its mission, or will be distorted into a questionable, 
if not positively injurious, agency. It is not only our duty, but 
we are urged by the demands of self-interest, to see that the 
exchanges follow the proper course in this regard. 

To some who have been unwilling or unable to devote the neces- 
sary time and thought to the solution of this problem, it has seemed 
that the best way to prevent the future contract exchanges from 
employing wrongful methods and practices is to destroy them all. 
It must be admitted that some excuse for this disposition towards 
summary prohibition and reprisal is supplied by the arrogant and 
contemptuous attitude of one of the exchanges of this country. It 
is difficult to submit with patience to the intolerance of an institu- 
tion which treats with indifference the just complaints of the 
producers and consumers of cotton and which flouts the disinterested 
criticism of the government itself. But summary vengeance against 
all future contract exchanges because of the attitude of one, is 
a course not only unjust in principle, but productive of unfortunate 
results. A fly on a man's head is an unwelcome and pestilential 
visitant, but it would be a monumental error of judgment to under- 
take to mash it with a spiked club. The Avelfare of the cotton 



67 

-trade and of all who are dependent thereon is too important and 
too vital an issue to be jeopardized because we are angry, or because 
we do not want to take the trouble to think. To the end that we 
may solve the problem rationally, and with the view of securing 

■a net return of good from our reformatory efforts, we must give 
some study to the question; we must ascertain what an exchange 

•ought to be and what it ought to avoid being; and then we will 
be qualified to regulate these instrumentalities of trade by an 
intelligent and effective ultimatum. 

OBLIGATION OF EXCHAjSTGES TO THE PUBLIC. 

There ^ was a time when private corporations, and other or- 
•ganizations of individuals joined together for specific benefits and 
■ profits, assumed the attitude, and effectively maintained it too, 
that so long as they did not come into collision with the laws of 
the land they were at liberty to use their organized power for 
their own profit and in utter disregard of the interest, welfare, and 
rights of all others not associated or affiliated with them. In other 
words, it was assumed that one of the franchises of corporate 
existence was the right to prey upon the public. This theory of 
relation, repugnant alike to our organic law and to the spirit of 
the people, and subversive of both economic and political liberty, 
has in recent times been challenged by a fierce denial. The people 
are now awake and will not tolerate the assumption of sovereignty 
by the creatures of their clemency. These bodies corporate or 
artificial persons invested with extraordinary power, are facing a 
Tery real arraignment for the misuse of this power; and it is an 
over-bold advocate or else a fatuous one, who will now defend 
corporate selfishness upon the theory of corporate right. 

Every corporation, whether it be a body chartered under law, 
or an association of individuals without special legislative warrant, 
is, either by express authorization or by sufierance, the creature of 
the body politic permitting it to exist and operate. Such corpora- 



68 

tion or association has no rights or powers which the people did not 
give it; and hence, has no warrant either in morals or in law, to 
nse these rights or powers for the oppression of any of the people- 
who conferred them. Any denial, therefore, by any of these- 
institutions, of obligations to deal fairly with the whole body 
politic and with all the members who constitute the same, is an 
untenable and punishable assumption. The defense that rights- 
have become vested, will not in such case avail, because the practice 
of brigandage, no matter how long continued, cannot, among a 
free people, ever become a vested right. 

OBLIGATIONS OF COMMODITY EXCHAXGES". 

The foregoing generalizations apply with peculiar force to the 
so-called commodity associations or exchanges, and especially ta 
those institutions of this class which deal with the products used 
to feed and clothe mankind. These institutions, although not 
organized and operated for stock profit or for the purpose of declar- 
ing money dividends to shareholders or members, nevertheless confer 
distinct privileges and considerable advantages upon those who 
participate in membership. Furthermore, the transactions con- 
ducted upon these exchanges and under the sanction of their rules 
and regulations, affect not only the interest of the members thereof^ 
but the welfare of millions of people who have no membership 
therein, and no voice in the framing of the code of laws and 
practice by which the said transactions are governed. The pur- 
chases and sales consummated in such exchanges by members there- 
of for their own account and as agents for outside principals^ 
establish the market value of the commodity which is the subject 
of such transactions; and the morals of such exchange, whether 
equitable and wise or unfair and partisan, is instrumental in 
determining the whole state of the trade. It, therefore, becomes 
obvious that the test of the usefulness of such exchange, and even 
of its right to exist, is whether or not it fully recognizes its obliga- 



69 

tion and responsbility to the public, and whether or not it makes 
considerate application of the powerful and comprehensive forces 
of which it is custodian or trustee, to the interest and welfare of 
all who are touched thereby. 

^Yhen note is taken of the fact that the subject matter of the 
transactions mentioned, constitute the necessary things of life, and 
that the integrity of these transactions involve the sustenance and 
protection of the whole family of human beings, the sense of 
-obligation contended for acquires a solemn emphasis, and the denial 
thereof presupposes not only a disposition and intention to profit 
^t the expense of the unprotected and the unwary, but a callous 
disregard of the demand of public spirit and humanity. Com- 
modity exchanges perform a most important function and indeed 
•constitute a necessity with which the trade could not without 
irretrievable loss dispense. They should, therefore, be protected and 
their usefulness encouraged; but whether or not a particular com- 
modity exchange should be protected and encouraged or assailed 
-and condemned, depends upon the fundamental consideration of 
whether it recognizes its relation and obligation to the public or 
•denies the same. Founded upon the disposition first mentioned it 
is a potent and comprehensive agency for good and its code of 
rules and practice will be consistent with its basic principle and 
consequently in accord with all interests affected thereby; based 
upon the other principle the institution is unsound at its core and 
is logically the breeding place of the wrongful practices which will 
ibe hereinafter specified and discussed. 



70 



CHAPTER XI. 



Discussion of the Rules Under Which Future Contract Trad- 
ing Is Conducted. 



It must be admitted that all exchanges^ and particiilarly all' 
commodity exchanges, lie under imperative obligation to employ 
their forces of organization in the interests of trade, as contradis-- 
tinguished from the interests of cliques or individuals; and not only 
to recognize the rights of all who are concerned with the commodity 
which is the subject of the transactions in such exchanges, but to- 
use their trade machinery for the protection of such rights. From 
this admission must be deduced the ultimatum, that upon the full 
recognition of this obligation, and upon the faithful performance- 
of the duties entailed thereby, rests the claim of such exchanges 
to the virtue of usefulness, and even to the right of existence. 

These propostions are self-evident and trite. To announce- 
them is to state what every thoughtful mind has already accepted 
as truth. We realize that no argument is necessary to establish these - 
obvious , principles ; we have emphasized them for a collateral pur- 
pose. The point is not so much to verify these principles, as to- 
emphasize the fundamental importance of a recognition of the same. 
We have called pointed attention to the right principle in order 
that we may specify in logical detail the concrete good results 
which follow consistence therewith, and the evil consequences that 
are entailed by departure therefrom. An exchange founded upon 
a full recognition of this obligation will naturally and logically 
enact laws, rules and regulations fair to all concerned: an exchange- 
based upon the contrary principle will naturally and logically con- 
struct and operate its machinery to the end that the few shall be- 
benefitted at the expense of the many. "A good tree cannot bring 
forth evil fruit, neither can a corrupt tree bring forth good fruit."" 

Having established the general test of moral responsibility by 



71 

which all exchanges must he tried and judged, it is now in order 
to give some special consideration to the instrnnientalities through 
which these institutions make their purposes effective — namely, 
the rules and regulations prescribing and governing the transactions 
consummated therein. 

When we begin to study the machinery or the system of trad- 
ing employed by the future-cotton-contract exchanges, logically the 
first subject for consideration is the future contract itself, with 
special reference to the terms and conditions thereof. 

THE TEEMS OF THE FUTURE COXTEACT. 

If the future contract is to be a hona fide trade agenc}^, and 
if it is to perform its protective office, which is its most important 
function, it must not only be fair and just to both of the parties 
thereto, but it must not hold any lurking peril, or any pitfall into 
which the umvary or the uninitiated ti^ader may stumble. 

It is eacy enough to anounce these general principles, but 
when it becomes necessary to formulate the specific contract which 
will answer these requirements, the task is not so simple as a good 
many disputants suppose. The proposition is a complex one and 
cannot be disposed of by the summary and off-hand dictum of the 
uninformed. What constitutes a fair contract as between buyer and 
seller, must be determined by another test than that of mathemati- 
cal division; and the safety, dependableness and utility of the con- 
tract, depends upon other consideration than the mere enforceability 
of its terms. We will briefly discuss these propositions separately, 
in the hope that certain prevalent misapprehensions may be cor- 
rected, and that an intelligent basis may be established for 
corrective measures. 

FAIE ALIKE TO BUYEE AjN^D SELLEE. 

The future contracts used in the two American exchanges are 
not objectionable in form or terms, but are, on the contrary, in 
these respects substantially correct. In the discussions of this 



72 

subject, a good deal of stress has been laid upon the fact that the 
said contracts contain the seller's option, or in other words, provide 
that the seller has the privilege of delivering whatever grades he 
desires — within certain specified limits; and furthermore has the 
option of delivering on any da}^ he determines — within the limits 
of the month and after reasonable notice. It has been contended 
that these options give the seller an unfair advantage over the 
bu3'er and that the latter should have at least an equal privilege 
with the seller in both of the above-mentioned respects. 

This argument has some superficial merit, but an analysis of 
the relative undertakings of the parties to the contract, will show 
it to be unsound. The postulate that the division of privilege 
between the two parties should be equal, would be correct, provided, 
that the obligations and risks assumed by the- two parties were 
equal. But where the undertaking of one party involves greater 
risk of danger and loss than is involved by the undertaking of the 
other party, it would be manifestly unfair to enforce an equal 
division of privilege. 

That the selling party in a future contract undertakes the 
more onerous obligation, and that the performance of his part of 
the contract entails more hazard and is more subject to vicissitudes 
than is involved in the buyer's commitment, is obvious. The seller 
undertakes to deliver cotton (which he may yet have to purchase) 
at some future time, or else suffer severe penalties. The grades 
he will find available at the time his contract matures will depend 
upon the character of the crop and of the stocks from which he 
must draw his supply; and the time during the month, at which 
he will make delivery, depends upon the vicissitudes of transporta- 
tion and other considerations over which he has no control; 
whereas, the buyer has only to provide himself with the means 
wherewith to pay for the deliveries. If, therefore, the buyer had 
the right to demand the delivery of specific grades on even a part 
of the contract, he could call for those grades which he had reason 



73 

io believe the seller did not have^ or could not procure, and thus 
force the latter into a breach of contract and the consequent penalty 
.and loss. Or, if the bu3^er had the right to select the time, or the 
"day during the month, at or on which delivery, in whole or in part, 
must be made, he might, by his knowledge of the seller's situation, 
iselect a particular time at which it would be inconvenient, or im- 
possible for the latter to make delivery. In such case, the delay 
of even a few days, caused by a railroad wreck or congestion, or 
some similar happening, might be the means of imposing a penalty 
.and loss upon the seller, which loss neither party contemplated 
when the contract was made. If, therefore, the terms of the con- 
tract obliged the seller to assume the risks aforesaid, and gave the 
buyer, in instances, the opportunity to penalize the former by 
reason of accidental causes ; one of two results would follow — either 
the seller would not contract at all, or else he would demand that 
ihe buyer pay him a premium for the unequal risk which the 
former assumed; and in either case the volume of future trading 
would be diminished to such an extent, and the price of the con- 
i;ract would be so affected by artificial considerations, that its 
utility as a hedge for non-speculative producers and merchants 
^ould be destroyed. 

EELATIVE VALUE OP CONTRACTS AND SPOTS. 

In this connection, it would be well to say a word about the 
relative value of future contracts and spot cotton. It is a funda- 
mental prerequisite of a good contract that it should in all respects 
be representative of the commodity for which it stands, and that 
its value should be on a substantial parity with the value of cotton 
in the spot market. But it is a mistake to compare, as many do, 
■the present value of cotton with the price of a future contract 
maturing in another or a distant month. It is error, therefore, 
to say that a future contract is bad and unresponsive because, for 
instance, spot cotton presently sold in July is materially higher 
■than the quotations for the October contract: Just as it would be 



74 

a mistake to condemn a contract because the price of spots in 
October, sav^ was lower than the fiitnre contract quotations for the 
following month of July. The comparison mnst be made between 
the yalue of spot cotton and the yalne of the future contract matur- 
ing in the current month. The quotations for the future months 
do not represent the value of cotton at the present time, but they 
record the consensus of opinion as fo what spot cotton will be worth 
at said future time. But it is. essential that the value of the con- 
tract maturing in the current month shall be substantially the same 
as the value of spot cotton. If the quotations for the contract 
should be materially or consistently lower or higher than the value 
of spot cotton, then it is proof that the contract has some defect 
which artificially advances its value above, or artificially depresses 
its value below its true, lona -fide value as a cotton contract. Thus 
it becomes clear, as heretofore stated, that any terms or conditions 
in a contract which give it either a fictitious premium, or which 
impose upon it an artificial discount, will always impair, and, if 
of sufficient moment, will inevitably destroy the usefulness of the 
contract as a trade utility or a hedge. 

It, therefore, follows that a contract is not necessarily ttnfair 
because it gives the seller some latitude in the option of the time 
during the month at which delivery shall be made: nor, as shall 
be shown in more detail hereafter, because it gives him an election 
as to the grades of cotton he will deliver, provided, always, that 
the time option shall be reasonable, and that the grade option shall 
be limited to cotton that is neither too low, nor too high, and to such 
grades as are, in normal times, salable and the actual subject of 
current market transactions. On the contrary, this latitude given 
the seller is necessary for that free and unrestricted issue and 
transfer of contracts which makes the future market, and supplies 
the spot trader with the protection which can be afforded only by 
the existence of such market. The "seller^s option,"' as prescribed 
in the future contract, is not per se unfair, but is correct and 



75 

necessary. The valid objection is not that the option given is in- 
equitable or wrong, bnt that nnder certain rules of certain Ex- 
changes, the seller is permitted to abuse this privilege and to 
impose such collateral burdens upon the buyer as will discourage 
the latter from receiving the cotton on contract, and, in con- 
sequence, depreciate the price of such contract below the value of 
the cotton it represents. 

In the succeeding article we will endeavor to show the neces- 
sity of a basis contract, or a contract in which the seller is per- 
mitted to deliver all merchantable grades within certain limits and 
restrictions. Having demonstrated the necessity of these several 
privileges, we will then proceed to show how they may be abused, 
and how they are abused ; and how a contract altogether fair in its 
terms may be, and is, made the instrument of injurious and corrupt 
practices. , '■....:■■ 



li-i-'lV ')i- '■•{ i 



76 



CHAPTEE XII. 



Further Discussion of the Rules Under Which Future 
Contract Trading Is Conducted. 



In the preceding article we undertook to lay down certain 
fundamental rules which should be observed in the formulation of 
all contracts for future delivery. We announced that the contract, 
in its terms, must be fair alike to both buyer and seller, and must 
not hold any lurking dangers or pitfalls into which the uninitiated 
or unwary trader may fall. We undertook to show that the 
*' sellers' option' as to the date (during the month) on which de- 
livery should be made, and as to the grades (within certain limits) 
that should be delivered, was not only a fair provision — provided it 
was fairly employed — but a necessary provision, if the contract was 
to realize the requirement that it hold no lurking peril or pitfall. 
The seller, undertaking as he does the more onerous and dangerous 
obligation, must be given a reasonable latitude as to the time of 
delivery, and a reasonable election as to the grades he will deliver; 
otherwise he may be made the victim of an accident or a "squeeze." 
In this event, the selling of a future contract would be attended 
with such uncertainties and dangers that few would be found 
willing to undertake the obligation at all, or unless they were paid 
a considerable premium for so doing. In either case the hedging 
value of the future contract would be destroyed, its most im- 
portant function would be impaired, and the very object of its 
existence defeated. 

THE BASIS' COXTEACT. 

Some superficial critics of the form of future contracts presently 
employed in the several exchanges, have found fault with the fact 
that they are all ''hasis" contracts, and not contracts for a specific 
grade or grades. A little reflection will show that the basis con- 



77 

tract — provided that the range of deliverable grades is not too 
wide, and provided alwa5^s that the terms of the contract are justly 
and without partiality enforced under the rules and by the practice 
of the exchange — is not only fair to both parties and dangerous to 
neither, but is in fact the only kind of contract under which any 
comprehensive system of hedging is feasible or even possible. 

The basis contract is a contract wherein the seller agrees to 
deliver, and the buyer to receive, a certain amount of cotton to be 
paid for at a certain price for a basis or standard grade, with 
additions to such price or deductions therefrom for such cotton 
as may be delivered of a higher or lower grade than the basis or 
standard. In cotton future contracts the basis is the Middling 
grade. The contracts in use in the several exchanges provide that 
any grade from Good Ordinary to Fair, inclusive, is deliverable. 
If it should so happen that only Middling cotton was delivered 
on the contract, then the buyer would pay therefor the price named 
in the contract; but if other grades than Middling were delivered, 
the paj^ment for such grades would be made on the basis of so 
much above or so much below the contract price — the amount of 
the premium or discount being determined by the relative differ- 
ence in value between the grades delivered and Middling, or the 
basis grade. To illustrate: 

Suppose A bought and B sold 100 bales of cotton for October 
delivery at the price of 12c per pound. When October came, if 
only Middling cotton was tendered, then A would pay B for the 
total number of pounds delivered at the rate of 12c per pound. 
It makes no difference what cotton might be worth when October 
came, the settlement of the transaction would be on the price 
named in the contract. But suppose, instead of delivering all 
Middling, B should deliver say 50 bales of Middling, 25 bales 
of Low Middling and 25 bales of Good Middling. For all the 
Middling A would pay 12c, but for the Low Middling he would 
pay as much less than 12c as Low Middling was worth less- than 



78 

Middling : and for the Good ^liddling he would pay as miicli more 
ihan 12c as Good Middling was worth more than Middling. It 
wotild make no difference what the current price of cotton might 
he at the time of deliyerv — Middling might be 15c or it might be 
10c, and the other grades correspondingly high or low — the parties 
to the contract in the illustration would settle on the basis of 12c 
for Middling, with additions to or deductions from said price for 
the other grades delivered, as stated. 

SOrXD IX THEOEY. 

The theory of the Middling basis contract is unassailable, and 
it is entirely possible to give it a practical effect which is fair, just 
and satisfactory to all bona fide traders therein. If the receiver 
is required to take only merchantable or saleable grades, and if for 
tlie grades other than Middling he is required to pay on the basis 
6f the actual difference in value between such grades and Middling 
that exists in the spot market at the time of deliver^', he can suffer 
no hardship because of the delivery of such grades or because of 
tlie basis contract. But it is also possible to make the basis con- 
tract an instrument of oppression and injury. This result may 
he ' accomplished by the operation of rules and practices of the 
exchange permitting the seller to deliver, and compelling the buyer 
to receive, cotton for which there is no market and which the 
buyer cannot dispose of except at a loss: and by giving the mer- 
chantable grades other than the basis grade a fictitious and incor- 
tect valuation, thus requiring the receiver in the contract to pay 
for such grades more than their actual relative value. These de- 
liveries of unmerchantable cotton and this improper valuation of 
th6 grades other than the basis grade are prolific sources of manipu- 
latioh of the contract price, and have done more than any other 
causes to bring reproach upon the system of future contract 
trading. A little later we will show specifically how these objec- 
iioiiable practices work, how the improper valuation is fixed, how 



79 

manipulation results, and how the market is affected by such 
manipulation. Our present purpose is to show that the basis con- 
tract correctly administered, is not only the proper medium for 
future trading, but is the only form of contract upon which an 
adequate and efficient system of future trading can be predicated. 

BASIS CONTRACT NECESSAEY. 

This series of articles has been written in vain if it has not 
been made clear that the primary and essential value of the system 
of future trading lies in the protection and facility it affords to 
those dealers in cotton who cannot afford to speculate or who do 
not want to speculate. The major function of the system is to 
provide the means whereby the owner or holder of cotton, or the 
prospective owner or holder thereof, may hedge his holdings or 
commitments. The important office of the future contract is not 
so much to provide the spinner with the specific grades which he 
spins into cloth, as it is to give him an insurance that when he 
needs the actual specific grades, the net cost thereof will not be 
more than a certain stated price. The value of the future contract 
to the producer lies not so much in the fact that through actual 
delivery thereon he will find a market for his crop, as in the fact 
that by using the contract he can insure to himself a stated net 
return for his crop and not take the chance of a decline before he 
can get it ready for market. The great use of the future contract 
to the buyer and exporter is not so much that it is a source of 
supply of actual cotton or specific grades, nor the medium of dis- 
tribution of the same, as it is that it gives him an insurance which 
will enable him to buy the farmer's cotton without having pre- 
viously placed the same, and to contract with the spinner for the 
specific grades the latter will need, even though he, the buyer or 
exporter, has not the cotton in hand. The fundamental advantage 
of future contract trading is, therefore, the insurance or hedge 
protection, just as the value of an insurance policy is the protec- 



80 

Hon it affords the insured. The enforceable specific performance 
of the terms of the future contract is the guaranty of this protec- 
tion, just as the enforceable performance of the contract of insur- 
ance is the guaranty of the protection which the insured has 
bought. To compel a man to take or make actual delivery on a 
future contract regardless of any and all circumstances or else 
go to jail^ as is proposed by certain legislative acts now pending, 
would be the same in principle as to compel a man to burn his 
house and thus enforce specific performance of his insurance con- 
tract, or else make affidavit that he intended to burn it, before he 
could validate his policy and purge himself of the presumptive 
charge that his transaction was gambling. ^(^ 

VOLUME OF CONTEACTS MUST BE SUPPLIED. 

In order that there may be a supply of such contracts from 
which producers, buyers, exporters and spinners may purchase the 
required protection, it is necessary that there shall be parties who 
are willing to offer to sell or buy, or in other words, to issue these 
contracts. As heretofore shown, the supply of contracts comes 
primarily from the speculative class. This division of trade is 
composed of individuals who on the one side believe that prices 
will be lower in the future, and on the other that they will be 
higher. The first mentioned parties offer to sell, and the second 
offer to buy. The producer, spinner, and spot dealer who desire 
to protect their holdings or commitments, as heretofore shown^ 
procure their supply of contracts from the trading center estab- 
lished for this purpose in the exchanges, and in turn become parties 
to such contracts, and obligate themselves to perform the terms 
thereof so long as they remain parties thereto. This speculative 
nucleus, reinforced and augmented by the hedge trading men- 
tioned, constitutes the future contract market. 

Now in order that there may be contracts available for those 
who want to buy, it is an obvious prerequisite that there must be 



81 

parties who are Avilling to sell. A man of ordinary judgment will 
not contract an obligation unless lie has reasonable assurance that 
he can fulfill it, and he would not contract to deliver cotton at 
some future time if, by the terms of the contract he was, upon 
pains and penalties, compelled to supply the grade of the buyer's 
selection or any grade which he might have difficulty in procuring,, 
or not be able to procure at all. 

There has been a good deal of discussion in this connection 
as to the advisability of narrowing the range of grades deliverable' 
on the contract, or of making the contract call for specific grades, 
or for no grade below Middling. Such stipulations in the contract 
would not only fail to advance the price of actual cotton, but 
would make the contract highly speculative, restrict its use to 
speculators only and would most probal)ly destroy the future 
market and deprive all traders of the hedging facility. It is 
entirely possible to formulate a contract that would be most attrac- 
tive to the buyfer, but such contract would do the buyer no good 
unless he could find some one willing to assume the selling side- 
of the obligation. Just as a person desiring insurance can con- 
coct a policy which would be very much to h's liking, l)ut he could 
realize no benefit therefrom unless he could find some one who 
would underwrite the risk on the terms proposed. It would do no 
good to sanction such policy by statutory enactment. Xeither 
Legislature nor Congress can compel a man to engage in a business 
or assume a risk which is objectionable to his business judgment- 
He would simply let it alone. 

SELLEE MUST NOT BE TEAPPED. 

Let us see why the basis Middling contract is essentiah and 
wljy a specific grade contract, or a contract on which onlv high 
grades could be delivered, would deter sellers to the extent of so 
narroAving the market and reducing the supply of contracts that 
the hedging protection, so necessary to the cotton trade, would. Be 
abrogated. 



82 

For illustration let us take in the first instance the producer 
'who is the primary seller of cotton. The farmer does not make a 
crop all of one grade, neither is his crop always of a high grade. 
The protection desired hv him is for his crop and not for one 
particular grade in that crop, nor for certain high grades of which 
he may have little or none. Suppose the producer was satisfied 
with the future price of cotton as shown hy contract quotations. 
•and desired to instire himself that he would realize that price and 
avoid the chance of a decline pending the time his crop was ready 
"for market. He would in such case sell a contract to deliver so 
much cotton as he expected to make or desired to hedge. Under 
the currently used basis contract he could deliver all the cotton 
he ma(,le. except such as was very low and of an unmerchantable 
character. But suppose the contract he sold provided that he could 
deliver onlv one grade, or certain specified high grades. When 
the time came for him to make delivery, he might find that he 
could deliver onlv a small proportion of his crop, and possibly 
none at all. In such case such contract would not be an asset but a 
liability : and not only would the seller fail to secure the protection 
for which he had bargained, l^ut would be penalized and '^^squeezed'* 
or mulcted by the buyer in addition. One or two such experiences 
would effectually eliminate the producer or primary seller from the 
market, and would in all probability bring swift legislative action 
against any such contract. 

But it may be contended that the producer does not use the 
contract market for hedging purposes to any great extent, and that 
the elimination of him therefrom would have no appreciable effect 
upon tlie volume of trading. Opposed to this contention it can 
be stated that a considerable number of planters do use the future 
market directly for this purpose; but even if they did not so use 
it at all, the effect would l)e the same. If the farmers do not use 
the future contract directly, still it is used by the merchant and buyer 
wlio purchase from the farmer, and thus the latter realizes the 



83 



l^enefit resulting from the future contract liedge^ even though he 
'does not personally handle the contract. 

The foregoing illustration is typical. The same experience 
falling to the lot of the merchant or cotton buyer who sold a con- 
tract Avould deter them from repeating the transaction, as effectu- 
ally as in the case of the producer who sold directly and suffered 
the consequences noted. The same conclusion is true in the case 
of the speculative element. The speculator is not looking for the 
worst of it in any particular, and, no matter how strong his con- 
viction might be that prices would decline, he would not enter into 
an obligation which would require him to do something which he 
• might not be able to do, and thus not only suffer a penalty for such 
default, l)ut place it within the power of the* speculative buyer on 
the other side of the contract to "squeeze" and mulct him. 

BUYEE MUST BE PEOTECTED. 

It, therefore, seems to be a reasonably correct conclusion that 
in order that the future market shall be Inroad enough to supply 
the required protection, and safe enougK to .warrant the use of the 
same, the contract prescribed should give the seller a reasonable 
option both as to the time of delivery and the grades that he will 
deliver. But on the other hand, the buyer must l)e protected from 
any misuse or abuse of this option in either respect, and from any 
hardships or burdens which would cause him to be mulcted and 
■deter him from buying the contract, or having bought it, would 
make him unduly eager to sell it out before maturity in order that 
he might escape taking delivery of the cotton and avoid losses that 
would 1)0 entailed thereby. 

The present contracts in force in the New Orleans Cotton 
Exchange and. the New York Cotton Exchange are in form as 
nearly correct as reason and experience can instruct. Both are 
Middling basis contracts, both stipulate that the deliverable grades 
shall be from Good Ordinary to Fair inclusive, and both give the 
-seller a reasonable option as to the time he will tender and the 



84 

grades he will deliver. Xo evil l:e5 in the form of the contracts 
Both of the aforementioned options, however, may be abused 
by the seller, and, unfortunately, are so abused when per- 
mitted by the rules of an exchange and abetted by the adminis- 
tration and officials thereof. It is this practice by one of the 
exchanges in this country that constitutes the most serious count 
in the indictment of future trading, and it is the arrogant refusal 
of such exchange to adapt its rules to the principles of equity 
that is responsible for the animus of the contemporary attacks 
upon a beneficial economic system which such exchange misuses. 
In the succeeding articles we shall endeavor to show just how an 
exchange may and how the exchange in Cjuestion does prostitute 
'Its function and its power by converting a contract ostensibly fair 
in terms and conditions into an uneconomic and predatorv agency.. 



85 

CHAPTER XIII. 
Abuse of the Basis Middling Contract in Future Trading. 



Although the basis Middling contract giving the seller the 
-option as to the grades he will deliver and the time he will make 
delivery — as limited and explained in the preceding papers — is the 
only form of contract that will supply the protection required by 
the cotton trade; yet the very provisions mentioned render the 
future contract peculiarly susceptible to misuse and abuse, and if 
these provisions are not fairly interpreted and enforced, may to a 
great extent nullify the usetulness of the contract and vitiate the 
•entire system of trading therein. It is, therefore, of the utmost 
importance that the exchanges in which such contract is the subject 
■of trade, should safeguard the same, and by prece]3t and practice 
protect the traders and the trade from an unfair and dishonest 
use of these necessary provisions and options. 

The particulars in which this form of contract may be abused 
are obvious. In the first place, the grade standards adopted by 
the exchange, upon which standard contracts are settled, may not 
be true standards but misrepresentations; not bona fide standards 
hut specially prepared parapJiernalia ; not clean cards but a marked 
deck : in which case the entire foundation of the contract is wrong ; 
the trader therein is misled and mulcted and the future contract 
based thereon vitiated and degraded. Secondly, where several 
grades may be delivered on a contract, and the grades other than 
the basis grade must be settled for at the relative difference in the 
value of said grades above or below the basis, these grade differ- 
•ences may be, by the rules of an exchange, incorrectly or improperly 
fixed: in which case one of the parties to the contract licjuidated 
by delivery must suffer a loss similar in principle to having his 
pocket picked; and furthermore, the contract based upon such 



86 

incorrect or improper grade differences loses its relation to th& 
commodity it is supposed to represent^ and becomes the instrument, 
of manipulation, if not actual fraud. Thirdly, an exchange may,, 
by its rules, permit the seller to abuse his option as tD deliveries,, 
and, by such abuse, to harass and put onerous, unjust and unequal 
burdens and charges upon the other party to the contract ; in which 
case, not only is the party receiving cotton under the contract the 
victim of wrong, but he is deterred from using the contract as the 
medium of actual transfer and the latter becomes thereby depre- 
ciated and debased. Each and all of these abuses may be prevented 
by requiring the future contract exchange, both in rules and prac- 
tice, to observe the principles of good faith in the establishment 
of its grade standards; of accuracy in the adjustment of grade 
differences; and of impartiality in the treatment accorded both 
parties- to the contract. 

A¥e will discuss these abuses seriatim, going into some detail 
as to the nature and effect thereof, and finally suggesting the 
remedies therefor. 

I. GKADE STANDAEDS. 

Tlie grade standards upon which contract settlements are- 
based should he established and employed in good faith. By this 
we mean that the standards adopted by an exchange should be- 
fairly responsive to the ideas of the trade, and should moreover 
be known, or easily susceptible of being known, to all men who- 
trade in the contract based thereon. 

The range of grades deliverable on the contracts of the two- 
future contract exchanges of this country is from Good Ordinary 
on the low end of the classification scale to Fair on the high. We 
have heretofore made the statement that no fault is to be found 
with this rang'e of contract grades. This statement is true, pro- 
vided that we know Avhat the exchange means by its classifications, 
and provided further that these classifications agree with a 



uniform standard representing the consensus of opinion among 
traders in actual cotton as to proper grade types. For instance, 
we might say that Good Ordinary is an entirely merchantable and 
spinnable grade^ having in mind a sample of cotton containing a 
certain amount of leaf or extraneous matter. But we would retract 
our assertion if we found that the Good Ordinary standard of a 
particular exchange consisted of a t^'pe much lower than the one 
we had in contemplation. In order, therefore, that the trader may 
know that he will not he required to take delivery of unsalable and 
depreciated stuff, he must knoAv that the lowest tenderable grade 
is no lower than a certain uniform standard with which he is 
familiar. Again: When the term Middling is used, the average 
trader sees in his mind's eye a certain grade, containing a certain 
amount of leaf or extraneous matter; and so on with all the other 
grades. When such trader buys or sells a contract he thinks he 
knows what kind of cotton he will have to receive or deliver for 
Middling, Low Middling and so on, and bases his calculations 
upon such assumption. If, however, when delivery is made, he 
tinds that the grade standards of the exchange in which his con- 
tract is settled, is different from his idea of grades, his calculations 
are upset and thrown awry. He may, perhaps, find that such 
standards are lower than he expected, and, consequently, if he was 
the buyer he would have to pay the contract deliverer more than 
he had anticipated. Suppose he bought a Middling basis con- 
tract for 10c per pound: he would be willing to pay 10c for what 
he thought was Middling, and would be willing to pay the proper 
premium or discount for such other grades above or below Middling 
as might be delivered. But if when the cotton was tendered he 
found that he would have to pay 10c per pound for cotton which 
the exchange on its standard called Middling, but which in his 
OAvn estimation and in the general estimation of the trade was 
lower than Middling, he would be called upon Jo stand a loss on 
the contract delivery which was unexpected and unwarranted. 



88 

Assuming, for the sake of argument, that the grade standards 
x)t a future contract exchange were afflicted with the vices men- 
tioned, what would he the result upon the trader and the trade? 
A man who had been required to take on a contract," a grade which 
the exchange called Good Ordinary, for instance, hut which he 
found he could not dispose of as Good Ordinary in the actual spot 
markets, and probably could not dispose of at all except at a 
ruinous discount : or a man who had been required to take up and 
pay for as Middling, Low Middling, etc., grades lower than the 
standards prevailing in actual spot markets, would do one of two 
things: either he would not buy the c-ontract at all again, or. if 
the exigencies of his business required him to do so. he would bid 
enough less for the contract to offset the loss he knew he would 
make if he took delivery, and. moreover, he would be so anxious to 
^void taking delivery and making the loss that he would sell out 
the contract at a sacrifice rather than liquidate it by taking the 
cotton. The inevitable effect of such defective standardization of 
grades would be to depreciate the contract of the exchange employ- 
ing the same, below the value of actual cotton : and the consequence 
of such depreciation would be not only to rob such contract of its 
legitimate trade utility, but to constitute it in the hands of inter- 
ested and 2>owerful oj^erators the effective means of preying upon 
the unwary. 

lAIPOETAXCE OF TXIFOEM STAXDAEDS. 

It now becomes apparent why fair grade standards, and 
■standards well known to contract traders, are necessary to the 
integritv of the future contract. There should be no hesitatitn or 
equivocation in this regard. The exchange that proposes to do a 
legitimate future business cannot do otherwise than adopt bona 
fide grade standards upon which its contracts are liquidated. It 
is not fair, neither is it honest to set a trap for the uninitiated 
and unsuspecting trader in contracts. The exchange pretending 



89 

to conclnct a legitimate business in contracts cannot consistently 
evade the demand that its grade standards be fairly representative 
of the consensus of trade opinion. The first thing an exchange, 
intending to deal honestly, would do, would be to adopt fair stand- 
ards, and then promulgate the same in order that all traders in 
its contracts should be fully apprised of what they might be per- 
mitted to deliver and what they would be required to receive. Any 
exchange which uses low and misleading grade standards and 
furthermore keeps the same under cover or makes it difficult for 
the trade to know what said standards are ; and any exchange which 
refuses to adopt a uniform, widely-known and generally-approved 
standard of grade, but persists in using its own private standards 
for the liquidation of contracts entered into by the general trade, 
cannot defend its attitude upon any other ground except that its 
primary object is to enable its memliers to make money, and that 
by pursuing such course it places an advantage in the hands of 
the initiated b_v means of which they may prey upon the outsider. 

GOVEEXMEXT STAXDAEDS. 

The United States Department of Agriculture, pursuant to 
instructions from Congress, has taken cognizance of this important 
issue and has prepared, adopted and promulgated a set of grade 
standards from Good Ordinary to Middling Fair. These types 
were selected by the Department with the advice and assistance of 
cotton-grading experts drawn from all branches of the spot cotton 
trade. These standards not only represent the best opinion of the 
trade as to what the several grades should be, but they are widely 
known and any man or institution desiring to do so may at a small 
cost purchase a set of the same. The man who sells or buys a 
-contract in an exchange which has adopted these standards, knows 
exactly what he may deliver and what he will receive for Middling 
and all the other grades when delivery on the contract is made. 
Consequently, a contract based upon these standards is representa- 



90 



live of actual cotton and not a flim-flam clevice employed for 
mulcting tlie nnwary. 

THE EEMEDY FOE FALSE STAXDAEDS. 

The remedy for this injurious phase of future contract trading 
is obvious and simple. In the interest of honesty and fair dealing, 
as well as for the purpose of preserving and perfecting a proper 
and ])eneficial system of future trad'ng, the Government should by 
law compel the future contract exchanges to adopt the grade stand- 
ards promulgated by the Department of Agriculture, or else suffer 
"the penalty of having the future contracts entered into under the 
administration of such non-conforming exchange prohibited and 
outlawed. 



91 ' : 

CHAPTER XIV.- 

Abuse of Basis Middling Contract in Future Trading. 

(Continued.) 
Continuing the discussion begun in the last article, con- 
cerning the misuses and abuses to which the basis future con- 
tract is subject, we will in this, dcA'cte some attention to the- 
second general particular in which these untoward incidents 
are manifest — namely, the incorrect and improper adjustment: 
of the difference in value between the basis grade and the- 
several other grades deliverable on contracts. 

II. GRADE DIFFERENCES. 

A¥e come now to one of the most important, and at the- 
same time, one of the most complex phases of the future con- 
tract. The complexity is, however, more seeming than real.. 
There is a perfectly natural, just and correct method of estab- 
lishing the grade differences in contract settlements, and' 
there is another method which is faulty, inecpitable and arti- 
ficial. "Where the one method is used, both the receiver and' 
the deliverer in a contract secures a fair deal, and the con- 
tract maintains its proper relation to spot cotton, and is a- 
fair representative thereof; where the other method is em- 
ployed one of the parties to the contract secures an unfair- 
advantage over the other, and the contract loses its represent- 
ative character and becomes, not the medium for the trans^- 
fer of actual cotton, but an agency for speculative manipula- 
tion. 

It is well within the limits of accurate statement to say 
that the strongest and best supported ground of the com- 
plaint against future trading, and of the antagonism thereto,. 



92 



is founded upon this particular abuse of a fundamentally le- 
;^itiinate and beneficial system. Men have observed the er- 
;/r.a-ti<?. and unrelated fluctuations in the value of contracts 
^which are liquidated under the unfair and uneconomic method 
"mentioned; have become incensed by reason of the losses in- 
r'flicted tlierel)T ; and have deplored the effect upon the value of 
'.the commodity supposed to be represented by such contracts, 
^produced by the manipulation thereof; and have rushed to 
the unwarranted conclusion that all future trading was bad. 
."Many men who have interested themselves in the question 
Ihave failed to perceive that the results of which they com- 
plain are not the natural consequences of future trading, but 
■'the products of a subversion of the system, accomplished 
through an artificial and incorrect method of establishing the 
grade differences upon which the contract is settled. They 
have failed to appreciate that the fault does not lie in the 
system- of future trading per se, but in tlie rules and regulations 
rof the Exchange which permits and enforces uneconomic and un- 
:fair methods of settlement. And finally, they make the mis- 
-take of demanding the prohibition of all future contract trad- 
ing, when the appropriate and efficient remedy lies in com- 
jpelling the Exchanges to rectify the bad rule and to employ 
'the proper method. If we understand clearly the proper and 
the improper methods of establishing these grade differences. 
'we will perceive plainly where the evil lies and be able confidently 
to apply the specific remedy. 

SYSTEMS OF ESTABLISHING GRADE DIFFERENCES 

The basis contract, as heretofore explained, is a contract 
upon which any of several grades, within certain prescribed 
limits, may be delivered; and settlement for the grades other 
than the basis grade is predicated upon the difference in 
walue between the grade or grades delivered, and the basis 



93 



grade. Suppose a man buys 100 bales of cotton for future de- 
livery on a basis contract, and pays therefore 10 cents per 
pound. When the delivery month arrives^ suppose the seller 
tenders a lot of 100 bales containing several different grades.. 
The receiver will pay for all the Middling, or basis grade,., 
the stipulated price of 10 cents per pound, and will pay as' 
much more or less than 10 cents per pound, for the other 
grades delivered as such grades are worth more or less than 
Middling. This is the theory of the basis Middling contract,, 
and it is equitable and sound. The essential point, however, 
is that the receiver shall pay the relative woitli of the grades^ 
delivered, or in other words, that the grade differences upon 
which settlement is made shall be actual and correct differ- 
ences. For instance, if one of the grades delivered should 
be low Middling, and if low Middling should be actually- 
worth on the m^arket one cent per pound less than Middling,, 
then the receiver should pay for the low Middling one cent 
per pound less than the contract price, or in the instant case= 
9 cents per pound, and so on with the other grades, either 
above or below Middling, delivered. If, however, in sueb 
case, the receiver is required by an arbitrary rule of the Ex- 
change to pay for the low IMiddling delivered only one-half' 
cent per pound less than the contract price, or 9 1-2 cents iu^ 
the illustrative case, when as a matter of fact low Middling, 
in the actual market at the time, was worth one cent per 
pound less than Middling, or 9 cents, then the injustice of 
such a rule is obvious, and it is easily understandable whv 
the purchaser in such contract should be anxious to avoid; 
taking actual delivery thereon and be willing to sell out his 
contract at a discount, in order that he might escape such 
delivery with its inevitable loss. 

The foregoing explanation and illustration leads us log- 
ically to the consideration of the two prevailing methods of 



94 



establishing tlie basis of settlements for grades other than 
^riddling, when the same are delivered on the basis Middling 
•contract. The method first indicated, or that method under 
which the receiver pays for the grades other than the basis, 
"the actual premium or discount for such grades in the cur- 
Tent market, is called the "Commercial Difference" System; and 
i:he other method, or that method under which the receiver 
Tnay be caiied upon to pay iucorrect and artificial differences 
"for such grades delivered, is called the "Fixed Difference^^ Sys- 
item. There has been a good deal of c-ontroversy waged over 
"the merits and demerits of these respective systems, although. 
in truth, there is small ground for debate. The first men- 
"tioned is the natural, economic and just method of adjust- 
nnent of grade differences: while the latter is an artificial, 
^arbitrary and inequitable device for separatiag people from 
their money. That these characterizations are true, we shall 
demonstrate before we have concluded this discussion: but 
if any of our readers should still be unconvinced and should 
require the testimony of some higher authority than the Union 
Guide, we refer such readers to the Eeport of Hon. Herbert 
Knox Smith. Comissioner of Corporations, United States De- 
partment of Commerce and Labor, to which report we have 
iberetofore called attention. 

'XOm:mekcial differences. 

The "commercial" difference system, which is employed 
in the New Orleans Cotton Exchange, makes contract deliv- 
eries fair to both receiver and deliverer. Under this system 
and the rules effectuating the same, when a future contract 
is liquidated by delivery, a board of disinterested expert 
-classers inspects and grades the cotton tendered. All bales 
outside of the limits of tenderable grades are rejected. Tho 
#5lassers furni.sh a certificate showing the grade (based on 



95 

the United States Government Standards) of each and 
every bale delivered, according to the marks of said bales. 
Reference is then had to the spot ciuotation board of the 
Exchange, which board shows daily the value of each and 
every grade as established by actual sales in the spot market. 
The difference between the value of the several grades, so 
found to exist, is applied to the several grades delivered on 
the contract. Thus if it should be found that Low Middling 
was actually worth in the market Ic per pound less than 
Middling, then the receiver would pay the deliverer for all 
Low I\riddling delivered just Ic per pound less than the con- 
tract price, and so on with all the other grades. The state of 
the actual current market establishes the grade differences 
in all instances and in every respect. The certificate of grade 
issued by the New Orleans. Cotton Exchange shows the grade 
of each particular bale and identifies each bale b}^ a specific 
mark or number. The correctness of such classification is 
guaranteed by ample financial responsibility. If the cotton 
covered by said certificate is redelivered on contract, it is not 
reclassed, but the grade or grades thereof stand as certified. 
The relative difference in the value of said grades, however, 
do not remain inflexible, but is established, as in the first 
instance, by reference to the spot market cjuotations existing 
at the time of such second, or any subsequent delivery. 

The fairness of a contract settled upon the foregoing 
terms is obvious, and the desirability thereof as a medium 
for the transfer of actual cotton commends it to all informed 
traders. The deliverer need have no fear that he will be paid 
a greater discount or a less premium for the grades he de- 
livers below or above Middling, than the same are worth, 
because he knows that settlement will be made upon the same 
differences that would obtain if he sold and delivered his 
cotton in the spot market. The receiver will have no fear of 



96 



a transaction under sncli contract and settlement, because he 
knows that he will pay the same premiums and discounts for 
the higher and lower grades delivered that he would pay if 
he bought the same in the spot market at hand. The assur- 
ance of safety in such deliveries is still further apparent in 
this : that although the receiver may be a merchant or a 
spinner requiring certain grades, and although it is true 
that on a contract delivery he may receive some other grades 
than those for which he has use, still he can receive such 
grades without fear because he knows that he will pay there- 
for the premiums and discounts that actually exist at the 
time, and. consequently, can dispose of such grades in the 
spot market at the same relative differences that he paid. 

This fair and logical method of settlement of the basis 
contract not only gives it value as a medium for the transfer 
of cotton from seller to buyer, but invests the contract with 
a character for stability, safety and responsiveness which 
makes it what it is intended to be — the respresentative of 
spot cotton and the Ijona -fide agency for the great volume 
of important and necessary -hedge transactions. Furthermore, 
and coincident with the character just named, it will be 
observed that contracts based upon the "Commercial'" differ 
ence method will normally maintain an approximate parity 
with the value of spot cotton and will not show those ruin- 
ous discounts under the value of spots which is occasionally 
exhibited in the case of contracts settled upon the basis of 
the other, or ■" Fixed'' difference system. 

''FIXED" DIFFERENCES. 

The ''fixed" difference system of establishing the rela- 
tive value of grades, other than the basis grade, delivered on the 
basis contract, employed by the Xew York Cotton Exchange, is not 
fair either to the buyer or seller, or to the commodity which is the 



97 



subject of the contract. In theory the system is nnfair to both 
parties a»d to the thing, but as the system is at times operated by 
said Exchange, the burden invariably falls upon one party 
to the contract — namely, the buyer or receiver, and upon the 
commodity which is the alleged subject of the transaction. 

Under this system, the several grades other than the 
basis grade, delivered on contract, are not settled for upon 
the actual difference in vakie that may obtain at the time, 
but upon certain arbitrarily assumed differences in value 
fixed by a committee of the Exchange prior, and possibly long 
prior, to the time of the delivery. On the second Monday in 
September a committee of the 'New York Exchange meets and 
decides that each of the grades below Middling are worth 
respectively so many points less than Middling, and each of 
the grades above Middling are worth respectively so many- 
points more than Middling. These differences, so fixed, re- 
main unchanged and unchangeable until the third jMonday in 
November, when the committee meets again and either re- 
affirms the differences already fixed, or establishes a new scale. 
The differences established at the November meeting of the 
committee remain unchanged, and, regardless of variations in 
the actual market differences, unchangeable until the follow- 
ing September meeting. 

Under this system the differences may not be correctlj^ 
fixed at either the September or November meeting of the 
committee, and it is, therefore, entirely possible that a ficti- 
tious valuation may be given certain low and undesirable 
grades, which valuation will maintain throughout the entire 
year and constantly depreciate the contract and exert an 
injurious influence upon the price of cotton itself. But even 
if these differences were correctly fixed in the original in- 
stances, there is no assurance that they will not be out of 
line almost immediately, or at any time thereafter. The 



98 



relative value of the several grades of cotton does not always 
remain the same ; on the contrary, this value may and does 
fluctuate with the relative supply of, and demand for the several 
grades. In a year when the weather conditions during the 
gathering season are good, the proportion of higher grades 
will be larger, and of lower grades less; hence, the lower 
grades will be worth relatively more and the higher grades 
relatively less, or in other words, the difference between the 
lower grades and Middling, and the difference between the 
higher grades and Middling will be narrowed. Or, if the 
contrary conditions should prevail, and the open crop be ex- 
posed to rains and storms and other damaging factors, the 
proportion of the lower grades would be greater, and of the 
higher grades l«ss; hence the grades below the basis would 
sell at a great^er discount and the higher grades at a greater 
premium than in the other case. 

The "fixed" difference system takes no account of the 
natural and inevitable variations in grade premiums and 
discounts. It assumes, for instance, that if low ^Middling is 
m November worth fifty points less than Middling, it will 
continue to be worth exactly fifty points less than Middtog, 
until the following September. This assumption is absurdly 
false in theory, and in actual experience is flatly contradicted. 
Indeed, in recent years Ave have seen a disparity of a full cent 
per pound between the actual selling price of certain low 
grades in the markets of the South and the relative value 
of such grades fixed by the New York Cotton Exchange. In 
which case the buyer or receiver on a contract of said 
Exchange would, by the rules thereof and the fixed differ- 
ences adopted thereby, be required to pay for such grades on 
the basis of one cent per pound higher than he could sell them 
for in any market in the world. 

The effects of such incorrect differences or fictitious val- 



99 

nation are obvious. If the low and undesirable grades are 
thus favored, such grades will inevitably be attracted for 
delivery on the contract liquidated on such differences. If 
the buyer of such a contract is not previously advised of 
this differential against him, he is, when he takes delivery, 
plainly buncoed. If he is advised that in the event he takes 
delivery he will be required to pay such fictitious valuation 
on such grades, he will also be certain that the deliverer will 
tender such artificially valued cotton. He would, therefore, 
figure how much he would lose if he took delivery and paid 
the fictitious fixed difference, and would bid the resultant price 
for the contract. Depreciation of the value of the contract 
is the inevitable result of such conditions, and the extent of 
the depreciation would be measured by the amount of the 
loss which the receiver would sustain by reason of such 
injurious method of settling differences. 

The practical results of "fixed'" differences and of tlie 
disparity between the value of the contracts licpiidated 
thereon and the value of spot cotten, caused by the employ- 
ment of this obnoxious system, is to discourage bona fide 
deliveries in the course of trade, by making the buyer oL' 
such contract shun actual delivery as he would the attentions 
of a highwayman. Having lost its character as the repre- 
sentative of cotton in the market, and having been robbed of 
its utility as a trade agency for the bona fide transfer of 
stock, such contract, so administered, becomes the haven for 
the flotsam and jetsam of the cotton crop, and, in the handsi 
of so-called "specialists," the means whereby the owner of 
cotton is wronged and the bona fide hedge trader despoiled. 

It may be, and is, claimed that the "fixed" differences 
are not always incorrect, but, on the contrary are in the 
majority of seasons in substantial correspondence with actual 
differences. It is unnecessary to even deny this claim. 



100 



Actinittmg this contention merely for the sake of argument,, 
the sj^stem of "fixed" differences remains indefensible. The 
fact that such differences mmj be incorrectly fi^ed, and may 
be thrown out of line at any time during any season, afiiicts 
the . whole system with unsoundness, just as one rotten link 
will destroy the integrity of the whole chain. 

THE REMEDY. 

The ''fixed" difference system is indefensible except upon 
the theory that the function of the Exchange employing the 
same is to make money for the members thereof, or a certain 
dominant division of such membership, at the expense of the 
outsider, of the commodity and of the general trade. "Fixed" 
diff'erences are likely to be incorrect, and incorrect differences 
that cannot be corrected, constitute an economic crime. The 
system should be summarilj^ abated. 

It should be borne in mind that this injurious incident 
of future contract trading does not inhere in the system 
itself, but is a defect of administration. A legitimate, meri- 
torious and indispensable business principle may be, by 
inequitable practices, prostituted to unworthy purposes. The 
remedy in such case is not to prohibit the utilization of the 
principle, but to outlaw the prostitution thereof. The 
"fixed" difference method of settling contract deliveries is 
not only unsound in theory, but harmful in practice ; and 
the prohibition thereof should be demanded both as a matter 
of a^bstract right, and as the means whereby the integrity OL 
a legitimate system of future trading may be preserved. 

The remedy is simple and effective. It is disclosed in the 
scriptural admonition "if thy right eye offend thee, pluck 
it out and cast it from thee." Congress may effect the re- 
quired prohibition by a law denying the instrumentalities of 
interstate commerce to parties who trade in contracts based 



101 



upon this condemned system, and may protect and perfect 
a proper system of future trading by an enactment that all 
future contracts not based upon the equitable and approved 
system of operation in this particular, should be included 
within the said prohibition. 



102 

CHAPTER XV. 

Abuses of Basis Middling Contract in Future Trading. 

(Concluded) 
Having pointed out how the basis contract may be mis- 
used and abused in the particular of depreciated and mis- 
leading private grade standards, and in the particular of 
artificial, arbitrary and incorrect fixed grade differences, we 
will now discuss the third general item of injurious usage to 
which such contract is subject — namely, the imposition, by 
the rules of an Exchange, of unfair and onerous charges and 
burdens upon the buyer who takes delivery of cotton. 

III. RULES IMPOSING UNJUST BURDENS UPON THE 

RECEIVER. 

It is inadvisable, within the limits of this discussion, to 
undertake recommendations as to all the rules which an 
deliveries. Our conclusions must, therefore, be in the nature 
of general principles, with an illustration of a flagrant viola- 
tion of the rule of fairness for which we are contending. We 
shall furthermore show the effect of the improper usage com- 
plained of on the contract contaminated thereby, and shall 
finally make some suggestions as to remedy. 

It has been heretofore shown that in order that the future 
contract may be a medium for the actual transfer of cotton 
and not a highly speculative device ; and in order that such 
contract may be broad and elastic enough to warrant the 
seller in incurring the obligation without fear of an ambus 
cade or "squeeze"; and in order, finally, as a corollary to 
the two foregoing propositions, that the volume of contracts 
available be sufficiently large and the contract market 
sufficiently comprehensive to supply the non-speculative 



103 



trader with quick and adequate hedge protection; it is neces- 
sary that the contract should cover all the merchantable and 
spinnable grades grown by the producer, (within a certain 
reasonable range) and should give the seller or deliverer an 
option as to which of said grades he would deliver. 

But if the exercise of this option by the seller is to be 
attended by no injurious consequences, it is imperative that 
the rules of the Exchange regulating the same, should be 
scrupulously fair both in the letter of the law and in the 
spirit of its enforcement. The harmful effects of the adoption 
by an Exchange of depreciated and misleading secret grade 
standards; and the injurious results of a system of contract 
settlement based upon artificial, arbitrary and incorrect fixed 
grade differences, fall logically within the purview of the 
pronouncements in this text against unfairness in the rules 
and regulations of an Exchange. But in addition to these 
fundamental considerations, there are certain inequities of 
detail applying in one of the Exchanges of this country, 
which impose such burdens upon the receiver in the contract, 
that he will, in order to avoid delivei'y, sell out his contract 
even at a considerable discount under the value of cotton in 
spot markets. We will cite one glaring instance of this dis- 
crimination against the buyer or receiver in the future 
contract. 

IMPROPER CERTIFICATION. 

The rules of the New York Cotton Exchange require that 
before cotton is tendered on a contract, it must have been 
examined by its classification department and a certificate 
issued showing the several grades in the lot. Delivery of the 
cotton is made by the passing o^ this certificate, together 
with the warehouse receipt covering the lot, from the deliverer 
to the receiver. This process is entirely correct, as far as it 
goes, but under the said rules, it does not go far enough. 



lOJ: 

The certificate of grade does not give sufficient information. 
It i« true that the certificate shows that a certain number of 
bales grade ^Middling, and a certain number Good Middling, 
Low Middling and so on. as the case may be, but it does not 
apprise the receiver by any means of identification, which 
particular bales are Middling, Ldw Middling, Good Middling, 
etc. If the receiver upon inspection of his grade certificate 
finds that there are in the lot a certain number of bales of the. 
particular grades he can use — if he is a spinner — or which he 
can place. — if he is a spot merchant — and he further finds that 
there are other bales of grades which he cannot use or pres- 
ently dispose of and which he desires to re-tender upon 
contract, he is unable to ascertain from the face of the cer- 
tificate which are the particular bales he wishes to segregate, 
but is put to the necessity of having the whole lot turned out 
and sampled; and furthermore his certificate is by tkis pro- 
ceeding cancelled, and if he desires to re-tender any of the 
cotton on contract, he is required to submit the same to the 
Exchange for re-inspection, reclassification and re-certifica- 
tion — all of which entails an added trouble and an extra 
expense, not called for by any reciuirement of trade but 
altogether gratuitous and wanton. 

By way of illustration suppose the receiver is a spinner 
who requires for his mill cotton grading Strict Middling to 
Good Middling. Suppose his certificate calls for 500 bales 
and he finds noted that there are 200 bales than he can use 
for lii-s particular Avants. Naturally, he would desire to with- 
draw these 200 bales from warehouse and ship the same to 
his mill, and the remaining 300 bales he would want to re- 
tender on a contract. Under the said New York Cotton 
Exchange rule he would, in order to accomplish this result, 
be obliged to go to the trouble and expense of having the 
entire lot of 500 bales turned out and re-sampled. He would 



105 



select the said two hundred bales therefrom, and in order 
that he might re-tender the 300 bales remaining, he would 
be compelled to re-submit the same to the classification com- 
mittee of the Exchange, to be by it re-inspected, re-sampled 
and re-certificated. 

There is no good reason why the certificate in question 
should not supply the receiver with the information which 
weuld enable him to take cotton on contract and dispose of 
it to advantage. On the contrary, there is every reason why 
these details should be supplied, if the framers of the con- 
tract and rules governing the same, intend in good faith that 
the contract shall be a trade utility and not a cover for some 
ulterior purpose. If after having made a contract of sale, 
the seller in any contract, attempts to block delivery by 
throwing obstacles in the way of the buyer, the presumption 
is well nigh conclusive that the seller i'S' not anxious to con-. 
summate the transaction according to the terms of the con- 
tract, but rather the buyer shall compromise, or settle in some 
other way more advantageous to the seller. When an Ex- 
change regulates the performance of its authorized contracts 
by 'rules and regulations which give the seller the adva»tage 
note?i and which gratuitously impose said burdens upon the 
buyer, the presumption is conclusive that the framers of such 
contract and such rules desire and intend that the contract 
be not liquidated by actual delivery, but Miat the buyer 
should be frightened off and induced to get rid of his con- 
tract upon the best -feerms he can secure from the seller. 
Tndeejd it would seem that the Exchange employing such 
methods, instead of desiring to facilitate bona fide deliveries 
on con<tract, was determined to prevent such deliveries ; and 
as a motive for such attitude it may with a considerable 
degree of justice be surmised that said Exchange was afraid 
that unhampered delivery on contract might be made the 



106 

means of depriving a so-called market of its artificially 
accumulated stock of cotton; and in order to prevent this 
catastrophe devised the rule in question as well as the others 
noted, to discourage buyers from demanding cotton, which 
under the terms of the contract they had every legal and 
moral right to do. 

PKOPER CERTIFICATION. 

In order to emphasize the injustice of the certification 
rule just criticised and the ulterior significance thereof, let 
us examine the proposition from the other side and consider 
the fairness and the beneficial results of a proper system of 
certification. 

The New Orleans Cotton Exchange, as has been hereto- 
fore stated, furnishes the receiver of cotton on contract, with 
a certificate showing the grades of cotton contained in the 
lot delivered. So far the rules of the two Exchanges coincide, 
but there is a material and significant difference between the 
two certificates. The New York certificate gives the number 
of bales of each grade, but does not identify the bales with 
their respective grades. The New Orleans certificate, on the 
contrary, shows on its face every bale in the lot, identified 
by marks or numbers, and opposite said marks or numbers 
the grade of each bale is specified. Thus the receiver, upon 
the mere inspection of his certificate, knows the character of 
his entire purchase and is able to segregate the same accord- 
ing to the dictates of his interest or engagements. Further- 
more, after he has withdrawn from the certificate such cotton 
as he desires to use or ship, the Exchange will, without cost 
to the holder and without any more formalities than a request, 
issue a new certificate for the residue. 

An exporter or spot merchant who supplies the mills, 
may, for example, take actual delivery on a future contract 



107 

when it matures. Under a proper system of certification^ 
when he inspects his certificate he will find that there are a 
certain number of bales of a given grade which he can sell 
to a given trade or to a particular mill. "With his certificate 
before him he will order out of warehouse these particular 
bales by marks or numbers and ship them to his customer. 
He will find certain other grades he can sell to certain other 
mills or trade, and these he will order out in the same manner. 
He may thus dispose of the entire lot received without leav- 
ing his desk and with no more labor and expense than is 
involved in writing out the necessary orders on the ware- 
house. Or, if there is any residue that he cannot place, all 
he has to do is to make the request, and the Exchange will 
give him* a new certificate for such residue, with each bale 
classed and its grade accurately identified therewith, as in 
the first instance, without any cost whatsoever. 

This rule of certificatien is in its terms and in its object 
fair and logical, and not only encourages producers, mer- 
chants and spinners to use the contract as a medium of trans- 
fer, distribution and supply, but by its honest and equitable 
treatment of both buyer and seller, tends to make the contract 
a representative of the commodity, and not the subservient 
agent of a elique of individuals who make their money by 
divorcing the contract from the alleged subject matter thereof 
and subjecting it to the vagaries of manipulation. 

The impairment of the hedge value of the future con- 
tract — which is, as heretofore stated, its most vital and com- 
prehensive function— effected through the abuse herein speci- 
fied, together with the abuses heretofore set out, is now 
obvious. If the future contract is to be a hedge, it must stand 
in the place of the cotton covered thereby, or in other words, 
be its representative, and not an independent agent subject 
to influences and variations to which the commodity itself is 



108 



not subject. The party requiring a hedge may not take or 
make delivery of the cotton covered by the future contract, 
but if he is to have an adequate and bona fide hedge, he must 
Ije assured of protection and fair treatment in the event that 
lie does take or make delivery. It makes no difference how 
:jiaaiiy different parties may have and use a contract during 
its currency, some parties vill have to liquidate it at maturity. 
The rules governing deliveries and settlements, therefore, give 
the character to a contract throughout its entire life. X 
future contract which is by the rules of delivery and settle- 
ment deprived of its representative and responsive character, 
does not, and cannot supply a legitimate hedge. It, there- 
fore, follows that such a rule as the one complained of herein, is 
not only unfair to individuals, but is subversive of the funda- 
mental merits and legitimate functions of future contract 
trading. 

THE REMEDY. 

The remedy for this particular abuse of the basis future 
contract and of the seller's option thereunder, does not appear 
to be so direct and specific as the remedies in the two afore- 
mentioned cases. If a cotton exchange, either because of the 
exigencies of its location or necessities, or from a wilful dis- 
regard of its semi-public character and its obligations to all 
branches of the trade it is supposed to serve, sees fit by its 
Tules and regulations to utilize its machinery for partisan 
.and private ends, it is not a simple matter to directly circum- 
Tent such desigM. All the details of administration cannot be 
•specifically regulated, because it would be impracticable for 
the law-making power to frame a set of rules for the govern- 
ment of all the business details of an Exchange. But the case 
is by no means hopeless. There are certain definite and essen- 
tial principles which may be enforced, and made operative for 
the proper working of the system. In the first place, the 



109 



compulsory adoption ty the Future Contract Exchanges of 
the National Grade Standards and of the "Commercial Differ- 
ence" system of establishing the relative value of the several 
grades in deliveries, would place the future trading system 
upon sound fundamentals ; and regulation in these vital re- 
spects would not only prevent the abuses complained of, but 
would b|^ logical compulsion bring about the adoption of 
detail rules consistent with such fundamentals. In the second 
place, an act of Congress commanding the observance by the 
Exchanges of certain cardinal principles of regulation and 
management, would consistently carry a provision charging 
some department of the government with supervision with 
respect to the proper observance of the said mandatory pro- 
nouncements. An act framed for intelligent application to 
the obvious abuses practiced under the name of future con- 
tract trading, with the supplemental safeguard of supervision 
by a department of the Federal government, would without 
doubt minimize, if it did not en^rely eradicate the injurious 
incidents of future trading, add to the usefulness of the 
Exchange, and preserve to the cotton trade that indispensable 
protection which can be afforded by future contract tradin-g, 
and by that agency only. 

RE-STATEMENT OF ABUSES. 

Having in the last three papers directed attention to the 
fundamental abuses to which an adequate and workable 
future contract is subject — which abuses constitute, in fact^. 
the basis of the complaints that are recklessly made against 
the whole system of future trading — we will, in order that 
attention may be concentrated upon the salient points of the argu- 
ment herein made, bring this part of the discussion to a con- 
clusion with a concise re-statement of the evils that militate 
against the system which we are endeavoring to explain and 



110 



which, when properly administered, we are determined tu 
defend. 

Grade standards upon which contract settlements are 
made, if too low, or if not in accord with the views of the 
trade; and if in addition, such standards are held for the 
information of the favored fcAv and not accessible to the 
trading public, open the door for fraud: and even if there 
should be no fraudulent intent or action, the use of such 
standards renders the specific performance of the terms of 
the contract by acceptance of delivery thereon, a hazardous 
and injurious undertaking, and thus undermines the bona fides 
of the future contract and perverts its character as an agency of 
trade. 

"Fixed" grade differences, in the first place give those 
who ''fix "them, the power to invest certain graces compris- 
ing a minute proportion of the crop, with a fictitious value 
when tendered on contract, thereby crucifying the buyer or 
receiver; and by the same act divorcing the contract from its 
proper relation to spot cotton, and making it the subject of 
unrelated manipulative fluctuations : and in the second place, 
even though the differences are not deliberately fixed for the 
purposes mentioned, still if such dMerences aft'e fixed and 
inflxible, the natural variations in the relations of supply 
and demand, may at any time bring about the harmful con 
ditions stated. 

Insufficient and incomplete grade certificates, and other 
phases of discrimination against the buyer or receiver on 
contract, cannot be designed for any other purpose than to 
discQurage such buyer or receiver from demanding or taking 
the cotton on his contract, and to induce him to get rid of 
his obligation at a discount to the end that interested sellers 
might buy in their shorts at a profit. Such practices are not 
only not indefensible in principle, but in practical effect they 
mulct the bona fide user of the contract, and assist in depre- 



Ill 

ciating the value of both the contract and the commodity, 
and in defeating the legitimate ultimate purpose of the 
former — namely, the transfer of actual eotton by the final 
holilers thereof. 

NOT PARTISAN OU SECTIONAL. 

It is no part of our purpose to make war upon any insti- 
tution per se. We have ded^iiced certain principles which 
apply to all cotton exchanges wherever domiciled and under 
whatever name they may be called. If it so happens that the 
rules, regulations or practices of a particular Exchange are 
in conflict with these generalizations, then we think that such 
Exchange, by name, is the legitimate subject of criticism. 
Our object is to promote a better understanding of the issue 
of future trading, to the end that the admitted evils may be 
eradicated without the necessity of destroying or impairing 
the good. The importance of the issue in both of its branches, 
justifies us in speaking plainly of the offenders as well as of 
the offence. 

The New York Cotton Exchange offends flagrantly, in- 
sistently and arrogantly in the three particulars stated. This 
institution maintains these cardinal irregularities in contemp- 
tuous disregard of the demands of both the producing and 
manufacturing divisions of the cotton trade for a fair and 
responsive contract, and in open defiance of the strictures of 
Commissioner Herbert Knox Smith of the Bureau of Cor- 
porations. 

These conditions should and must be changed. Not by 
any vindictii\^e legislation aimed at the New York Exchange, 
nor by any wholesale prohibition of future contract trading. 
The direct and effective method is to establish certain stand- 
ards of trading to which the future contract exchanges must 
conform. If they do not or can not conform, it is their 



112 

fault or misfortune. By analyzing the system and its abuses 
we have endeavored to lead up to the point of outlining a 
concrete plan for improvement. Legislation is needed, but 
we must be very sure that our efforts in this regard shall be 
intelligent, discriminating and constructive; not haphazard, 
vindictive or destructive. We will devote a next succeeding article 
to a discussion of the latter^ or hurtful, modes of reformation, and 
in the article following thereafter, we will bring the series to a close 
with certain suggestions for legislation along what we believe to 
be sane and constructive lines. 



113 



CHAPTER XVI. 



Future Contract Trading : . Summary of Uses, Abuses, 

Remedies. 



The series of articles on Future Contract Trading, which 
has been running in the Union Guide, will, as stated in our last 
issue, be brought to a conclusion with a discussion of the 
pending and proposed legislation relating to the subject. If 
we have properly diagnosed the trouble, the next important 
step is to find the appropriate remedy. A physician may be 
accurate in his conclusions as to the nature of his patient's 
malady, and yet through a want of care and thorough atten- 
tion, may administer the wrong remedy and kill the patient. 
In an effort to avoid this fell conclusion, we will re-state the 
case in as concise a form as possible, to the end that our 
minds may firmly grasp the essentials of the subject before 
we undertake the important and dangerous task of formu- 
lating the efficient remedy. 

LEGISLATION ENACTED AND PENDING. 

In recent years a great hue and cry has been raised 
against trading in contracts for the future delivery of cotton. 
All of the Southern States, with the exception of two, have 
enacted laws, more or less drastic, directed against such trad- 
ing. Organized future trading is carried on in the New Or- 
leans Cotton Exchange and the New York Cotton Exchange. 
Neither the State of Louisiana nor the State of New York 
has adopted anti-future trading laws, hence it is still possible 
to buy and sell future contracts in said Exchanges. The said 
state anti-future laws have not in fact prevented the citizens 
of said states, who are engaged in the cotton business and for 



114 

whose business future trading is a necessity, from bujine 
and selling for future delivery, but these laws do to a great 
extent actually prevent such trading by parties who have n> 
use for the future contract other than as a medium for specu- 
lation. But the anti-future advocates are not satisfied wita 
what has been accomplished, and have been and are now at- 
tempting, through Federal legislation, to prohibit all futiir«? 
trading, whether necessary or nnnecessary, whether legiti- 
mate or otherwise, by closing np the future trading depart- 
ments of the American Exchanges, and thns depriving Amer 
ican citizens and producers of both the right and the oppor- 
tunity to trade iu said contracts, and turning over to the 
European markets and manufacturers the uncontested priv- 
ilege of shaping future prices for their own selfish interest 
and ends. 

In this crisis it is imperative that the people of the South 
who are iuterested in the price that cotton brings and in the 
welfare of the cotton trade — and all the people of the South 
are either directly or indirectly interested in these issnes — 
shoud proceed with caution and judgment, lest by a reckless 
interference with economic laws, the whole complex machin- 
ery of the cotton trade shall be thrown out of gear and the 
fabric of modem business issuing therefrom, come forth rent 
and wrecked. 

FUTURE CONTRACT TRADING. 

Future Contract Trading is not understood by the great 
majority of people, and is woefully misunderstood by the 
great majority of its opponents. It is an economic issue which 
caUs for scientific and discriminating attention. It has been 
made a political issue and utilized as the basis of demagogic 
appeals to prejudice. Without any intention of defending 



115 

the abuses that have been practiced in the name of future- 
contract trading, but with every desire, and a fixed deter- 
mination, to exert our every effort to wards the eradication 
of such abuses^ we are constrained to issue a solemn warning 
to the farmers of the South, that they pay greater heed to 
the admonitions of sane counsel than to the fustian of stump 
speaking. 

Future Contract Trading per se is not lad, but is on the 
contrary entirely legitimate, and in the evolution of the trade 
has become absolutely necessary to the advantageous move- 
ment of the immense volume of the present day cotton crop. 
In order that the future contract should perform its full and 
proper function, the trading therein must be concentrated at 
certain given centers and systematized by certain appropriate 
rules and regulations. These necessary centers of operation 
where trading is reduced to rule and order and where buyers 
and sellers in person or through representatives, are brought 
together, thus constituting the future markets, are called 
future trading Exchanges. The system of trading as devel- 
oped, has been, and is, productive of great fundamental ben- 
efit to all divisions of the cotton trade from the producer to 
the spinner and from the spinner to the ultimate consumer. 
But it is not to be denied, but rather charged, that in this 
development abuses have been engendered and injurious re- 
sults entailed. Analysis will demonstrate that these abuses 
and results are not the logical consequences of future trad- 
ing, but the fruits of inequitable rules and regulations and 
injurious practices in force, particularly, in one of the Amer- 
ican Exchanges. To differentiate these incidental evils from 
the fundamental good and to destroy the one without harm 
to the other, is one of the most important, if not the para- 
mount, economic issue before the people of the South to-day. 



116 

THE CONTRACT. 

The future contract is a legal and. binding obligation. 
Two parties, through their agents, enter into an engagement, 
the one to deliver and the other to receive a certain number 
of pounds of cotton at a stated price and at a specified time 
in the future. This contract, when it matures, must be liquid- 
ated either by specific . performance of the terms thereof, 
or settled by the agreement of both the final parties thereto. 
The original principals to the contract, however, need not 
necessarily be the final holders. The obligations of the con- 
tract may be in the meantime transferred to any number of 
parties. This facility of transfer makes available a large vol- 
ume of trading, and out of this supply, the non-speculativo 
producer, merchant, buyer and manufacturer is able to secure 
his hedge, or that protection against fluctuations in price, 
which is as essential to any of the parties mentioned, as a 
policy of insurance is to the owner of any property. 

PRACTICAL USES AND BENEFITS. 

If the spinner can go into the future market and by buy- 
ing contracts insure himself that he can obtain a requisite 
amount of cotton at a stated price when he needs it. he is in 
a position to contract ahead for sale of the output of his mill, 
and thus enlarge his business for his own profit, and increase 
the consumption of cotton for the benefit of the producer. 
The more business the spinner does, the greater amount of 
cotton he consumes, and the more stable his business and 
the fewer risks he takes, the cheaper will he be able to sell 
his manufactured output. He can secure this protection in 
only one way, and that is through the future market. If this 
market were destroyed and the spinner deprived of his hedge, 
the following results are demonstrable : Because of decreased 
consumption the farmer would receive less for his product, 



117 



and because of the increased risk and cost of manufacture, 
he and all wearers and users of cotton goods would pay a 
higher price for their supply. 

If the spot cotton buyer in the interior markets of the 
belt can go into the future market and by selling contracts 
insure himself that he will obtain a stated price for any spot 
cotton that he might buy, he is in position to make an oft'er 
on all cotton that comes to market, even though he has at 
the time no order from the spinners for such cotton as he 
might purchase. Thus an outlet is created for cotton that 
must be marketed, even when there is no demand from the 
actual users thereof or the manufacturers; and the farmer is to 
an extent relieved from the burden of carrying the cotton 
until such time as the spinner had need for it, or else of auc- 
tioning it off to bargain hunters. The buyer can secure this 
necessary protection or hedge, in only one way, and that is 
through the future market.^ If the facility in question were 
destroyed, this source of demand would be curtailed, and if 
the farmer was dependent upon the spinners alone to buy his 
cotton, he would frequently find times at wdiicli it was impos- 
sible to sell, and in any and all events he would have to carry 
his cotton until it suited the spinners to buy it, or else sell it 
at the price dictated by his adversary. The demonstrable 
results in such case would be the elimination of the small 
buyer, the concentration of the buying poAver into a few 
strong hands in combination against the farmer, the estab- 
lishment of a limited number of large markets and the de- 
struction of the multitude of smaller buying centers, the anni- 
hilation of buying competition, and in consequence of all 
these, an inevitable decrease in the amount the producer 
Avould receive for his crop. 



118 

PRESENT SITUATION. 

In this connection attention may be profitably called to 
the present situation in cotton. By some unthinking or un- 
informed persons, the great decline during the months of 
September and October is charged to speculation. To the 
attentive observer such statement is perceived to be far from 
the truth. The pressure on the market causing the decline 
in prices has come primarily and consistently from the owner 
of actual cotton. It is not our purpose to criticise the farmer 
for his precipitation in rushing his cotton on an over-supplied 
and unwilling market. The excuse of necessity in some cases 
and of fear in others, may be urged in extenuation. But the 
fact remains that the farmers themselves did smother the 
market with offerings. Speculation was influenced by the 
course of current spot prices and did not lead the decline. 
Spot offerings broke the market and future contracts fol- 
lowed. That this statement is true can be proved by refer- 
ence to the future contract quotations of the New Orleans 
Cotton Exchange and the comparative spot prices, especially 
in the markets of the eastern part of the belt. 

But it will be asked, if our contention be true that the 
future market affords an outlet for cotton that is weighing 
upon the market, why has not the future market absorbed the 
recent and current surplus of offerings and maintained prices? 
Our answer is that to an extent this is exactly what the fu- 
ture market did do. There was no human' agency that could 
have withstood the effects of the stupendous rush of supplies 
to market, but if it had not been for the future market, in 
which buyers could hedge their purchases, these effects would 
have been disastrous instead of distressing. Suppose there 
had been no future market, and suppose, because of inability 
to hedge purchases for which there was no present demand, 



119 



the great multitude of buyers had been driven from the mar- 
ket and the producer left dependent upon the current needs 
and demands of the spinner^ and upon these demands alone? In 
such case the pressure would have been infinitely grater than it 
was, and we w^ould have had, not a serious decline in the 
price of cotton, but a panic in the cotton trade. Let those 
who are clamoring for the prohibition of future trading and 
the destruction of the future markets, ponder well this pro 
tective phase of the future contract, and what it means not 
only as an agent for stimulating an advancing market, but 
as a buffer to a market temporarily over-supplied and smothered by 
actual cotton. 

Briefly, the hedge supplied by the future contract, and by 
that agency alone, constitutes an insurance against the risks 
of handling cotton, which insurance enables a multitude of 
buyers to compete with each other and with spinners in the 
purchase of the farmer's crop, and enables the spinner to 
conduct his business at the minimum of cost and risk to him- 
self, and to enlarge his consumptive capacity to the great, 
benefit of the producers of cotton. If this protective facility 
should be destroyed the effect upon the value of the com- 
modity and upon the machinery of the cotton trade, would 
be similar to the demoralization of general business and the 
shrinkage in the value of all property, that would follow the 
prohibition of all underwriting by insurance companies. 

But in magnifying the importance and necessity of future 
contract trading we must not lose sight of the evils that have 
grown out of the sytem under which such trading has been 
in instances operated. If we are under obligation to preserve 
and utilize the beneficial functions, we are no less constrained 
to prohibit and destroy the injurious features thereof. 



120 

EVILS OF FUTURE TRADING. 

The obvious evils Avliich future contract trading has de- 
veloped, may be designated under two general heads, viz. : 
Excessive Speculation, and Mcinipulation of Prices by Means of 
Unfair Rules and Prcxtices in the Exclumge. Blame for the first 
mentioned injurious development falls primarily upon the in- 
dividuals who misuse and abuse the contract facility; repre- 
hension for the second named, must be directed toward the 
Exchange which formulates the rules and permits the prac- 
tices complained of. 

EXCESSIVE SPECULATION. 

The great wave of speculation which swept the, country a 
few years ago and which was to a great extent responsible 
for the crusade against future trading, had one important 
phase of manifestation which has been erroneously charged 
against contract trading and cotton exchanges. This phase 
was what is called ^' Bucket-Shopping.' ' A large proportion 
of the said results of the speculative mania is properly attrib- 
utable to the indefensible practice named. Bucket Shops are 
not Cotton Exchanges, nor is "bucket-shopping'^ trading in fu- 
ture contracts. The bucket shop is a gambling institution 
pure and simple, and its proprietors bet with their customers 
upon the fluctuations that occur in the value of actual con- 
tracts, as registered by actual trades made in legitimate 
cotton exchanges. There is as much sense in attempting to 
destroy bucket-shopping by prohibitiiag future contract trad- 
ing, as there would be in an effort to stop betting on horse 
races by killing all the horses. Inasmuch, therefore, as 
bucket-shopping and future contract trading are two separate 
and entirely distinct propositions, and in further considera- 
tion of the fact that bucket-shopping has been practically de- 
stroyed by legislation in the several Southern States, and can 



121 

be rooted up and cast out forever by other legislative acts 
specially directed thereat^ this practice can not logically be 
considered as an evil for which future contract trading is 
responsible. 

Speculation is neither wrong nor wicked, per sej but on the 
contrary gives life to all trade and vitality to all enterprise. 
But speculation may be abused, and when this is the case re- 
strictive measures should be employed. Speculation by the 
general public, and excessive speculation, even by those who 
are financially able, and equipped in other respects to assume 
the risk entailed, constitutes an injury to the individual 
trader and an unhealthy and hectic element in the body eco- 
nomic. But as has been stated, this is the fault of the individr 
uals who abuse the principle of speculation. The speculative 
principle is not only a beneficial and vital influence in trade 
and being such, should not be eradicated, but it is an instinct 
inherent in human nature^ and being such, can not be erad- 
icated. The remedy lies in regulation. To undertake to pre- 
vent tjie individual from abusing the principle of speculation, 
by attempting to destroy all opportunity to speculate, would 
be no less illogical than to essay the suppression of profanity 
in individuals, b}^ the command that all men should remain 
speechless and dumb. But this evil of excessive and indis- 
criminate speculation, as it relates to the effect on the indi- 
vidual speculator, has been to a great extent taken care of by 
the State laws heretofore mentioned. The larger economic 
phase, or the effect of excessive speculation upon the com- 
modity, and the trade therein, which is the subject of such 
transactions, is easily traceable to a particular future trading 
institution, organized for the purpose of promoting specula- 
tion, and operated under a system of rules and regulations 
which puts a premium upon speculative manipulation. Thus 
we arrive at the crux of the complaint against future contract 



122 

trading — the specific source of the contamination ^vhich has 
brought the whole system into reproach, namely: 

MANIPULATION BY MEANS OF UNFAIR RULES AND 
PRACTICES IN A COTTON EXCHANGE. 

A future contract Cotton Exchange, if it is to realize its 
proper and beneficial function, and if it is to escape condem- 
nation as a menace and an injurious influence in the trade 
it purports to serve, must recognize as the fundamental basis 
of all its operations, its obligations to the public, or to the 
entire division of the public interested in the commodity 
Avhich is affected by its transactions^ and must not direct its 
activities upon the assumption that it is a private club, or- 
ganized in the interest of its members, or a certain favored 
clique of its membership, to enable these to profit at the ex- 
pense of the outsider, and of the commodity which is the os- 
tensible subject of trade. If the Exchange is organized upon 
the first mentioned theory, the rules and regulations under 
which it operates will of logical necessity be open, fair and 
eciuitable to all concerned; if organized upon the other theory 
it will, in its laws and practices, make manifest its partial, 
unfair and inec[uitable purposes. 

There are three fundamental particulars in which a fu- 
ture contract exchange may offend against the plain prin- 
ciple of right, mulct the uninitiated individual trader, depre- 
ciate the value of the future contract and of the commodity 
for which it is supposed to stand, convert a logical trade 
utility into a highly speculative medium, and finally, by such 
means, encourage speculation not of the legitimate,, stimulating, 
beneficial type, but of the injurious, ^^sure thing," manipulative 
variety. 



123 

The first of these particulars of offense is the use by an 
Exchange of grade standards, as the basis of settlements on con- 
tract deliveries, which are depreciated, misleading and not 
known or accessible to the parties to the contract, unless they 
happen to be members of that Exchange. 

The second particular mentioned, is the adoption by an 
Exchange of the uneconomic, inequitable and condemned sys- 
tem of ''fixed" grade differences which govern in contract de- 
liveries, and which, as has been demonstrated by disinterested 
testimony, not only establishes artificial values, to the detri- 
ment of the individual trader, the trade and the commodity 
traded in, but opens the door to actual fraud. 

The third particular is exemplified in rules imposing un- 
equal burdens upon the buyer or receiver on a contract, thereby 
penalizing the latter for demanding and taking delivery of 
cotton thereon, discouraging him from so doing, depreciat- 
ing the value of both the contract and the commodity, and 
encouraging speculation on one side of the market — namely 
the short side. The most conspicuous example of such rules 
is the imperfect system of grade certification heretofore ex- 
plained. 

THE CUEE. 

This is the case against future contract trading. It will 
be readily perceived that the untoward developments in the 
system are not inherent in the system but are the results of 
specific acts of misuse and abuse. The basis of the trouble 
can be reached without difficulty through the enactment by 
Congress of. certain fundamental provisions to which all fu- 
ture contract Exchanges must conform. To be more specific : 
An act of Congress 



124 



(a) making compulsory the adoption by such Ex- 
changes of the grade standards approved and promul- 
gated by the United States Department of Agriculture ; 

(b) outlawing the obnoxious "fixed" difference 
system; and 

(c) authorizing a department of government to 
supervise the operations of such Exchanges and report 
violations to the proper officers, 

should effectually eradicate the evils growing out of the 
wrong use of the system of future trading without the neces- 
sity of destroying the system itself, and thereby bringing de- 
moralization upon the cotton trade, and loss upon the pro- 
ducer of the oTeat world-desired asset of the South. 



125 

CHAPTER XVII. 

Anti-Future Legislation Pending and Proposed. 



Having set forth the economic necessity for a properly 
regulated system of future contract trading; having laid 
down certain fundamental principles that should govern 
those Exchanges in which future trading is conducted; hav- 
ing pointed out certain injurious developments in the futur^^ 
contract system as it is operated under certain unfair rules 
and regulations specified; and finally, having reached the con- 
clusion that the beneficial function of the system can be pre- 
served and perfected and the evil developments eliminated 
only through regulative legislation and supervision by the 
Federal government, it is now in order to examine certain 
pending legislative efforts and to offer some concrete sug- 
gestions as, to the kind and form of legislation that will pro- 
duce the desired results. 

DESTEUCTIYE LEGISLATION. 

The first and most important consideration is that legis- 
lation on this subject should be regulative or remedial and 
not destructive. Those drastic anti-future measures which 
propose to eradicate the incidental evils by prohibiting all 
future contract trading would, if enacted into laws, smite 
the cotton trade hip and thigh, demoralize the demand for 
cotton and the markets therefor^ and would saddle the 
greater sh^re of the resultant loss upon the man who ulti- 
mately pays the penalty for wildcat economic legislation — 
namely, the producer. No less disastrous would be the effects 
of legislation, although in terms not absolutely prohibitive 



126 



and althoiigli according to tlie professions of proponents, 
merely regulative, which being based upon an imperfect 
knowledge of the subject or a crude conception thereof, pro- 
poses a use of the future contract altogether impossible to 
honest men, and hence in logical result, prohibitive. 

The acts now pending before Congress are all of the 
aforementioned destructive character. Typical of this sort of 
legislation is the Scott Bill which was introduced in the 61st 
Congress, amended in House Committee on Agriculture, 
passed by the House, amended in Senate Committee, and 
finally dying on the calendar upon the adjournment of Con- 
gress, March 4th last. This bill has been re-introduced by 
Hon. A. S. Burleson of Texas, and is now pending. As it is 
probable that this measure will receive consideration at the 
forthcoming session, it is of vast importance that its signif- 
icance be fully understood. Before undertaking an analysis 
of the technical provisions of this bill a little introductory 
matter may be with profit presented, for the purpose of show- 
ing that the measure is not a great moral agent, as its pro- 
ponents claim, but merely a clumsy attempt to interfere with 
economic customs and laws. 

ALLEGED AXTI-GAMBLIXG MEASURES. 

A\^hen the Scott bill was originally introduced back in 
1909, its prohibition covered future contracts relating to 
grain, cotton and all other farm products. It was proclaimed 
by its proponents as a great moral measure which would anni- 
hilate the pernicious practice of "gambling" in farm products. 
As the bill fared on its way, however, the "moral" phase 
met with a mishap. AVe find that the bill, Avhen it had finally 
been reduced to the form in which it passed the House, no 



127 

longer applied to grain and the other farm products, but its 
prohibition related to cotton contracts only. It appears that the 
grain farmers of the West, fully satisfied with the effective 
''anti-bncket-shopping'^ laws which their several States had 
enacted, and realizing the great advantage accruing to them 
from legitimate future contract trading, objected to the in- 
clusion of their com^modity within the prohibition of Mr. 
Scott's bill. It may be remarked in passing, that Congress- 
man Scott represented a Kansas district^ that — as we are 
informed — in the last election he made his campaign largely 
upon his activity in connection with his anti-future bill, and 
that his prosperous constituency promptly retired him and 
elected another Congressional representative in his stead. 

But, passing these collateral considerations and return- 
ing to the main issue, the fact remains that the Scott bill in 
its ultimate form, and its successor, the Burleson bill in its 
present form, did not and does not prohibit future contracts 
relating to grain and the other farm products, but such con- 
tracts only as relate to* cotton alone. If it is morally wrong 
to trade in cotton future contracts, it is morally Avrong to 
trade in such contracts Avhen they relate to grain or any other 
commodity. A man can not claim to be a good prohibitionist 
if while he fulminates against corn whiskey, he winks at the 
drinking of rye. By eliminating grain and other farm pro- 
ducts from the prohibition of the proposed statute, its pro- 
ponents have definitely abandoned the moral issue. They 
must quit prating about the sin of gambling and give us some 
economic basis for their measure and advance some argument 
to show why trading in cotton futures is bad for the cotton 
trade, while trading in grain futures is good for the grain 
trade. Probably they will tell us that the system of trading 



128 

in grain contracts is regulated to better advantage than is 
the case Avith the system of trading in cotton contracts. This 
brings the issue scjuarelY in line with our contention that fu- 
ture contract trading yer se is l)enej[icial. but that certain inci- 
dental developments therein are injurious ; and is an unequiv- 
ocal admission that the remedy lies in the regulation of the 
system under which such trading is conducted and not in the 
annihilation of the future contract itself. The test by which 
any proposed legislation should be tried is, therefore, clearly 
perceivable. If a proposed law will regulate future contract 
trading and preserve the benefits of the same^ it is good and 
should be enacted; if it materially impairs or destroys the fa- 
cility, it is bad, and should not be passed. Does the Scott 
bill, and its successor the Burleson bill, fall within the one 
characterization or the other? We claim that this proposed 
legislation is destructive and not regulative ; and further- 
more, we insist that it would not only destroy the hedging 
facility and prohibit the legitimate use of the contract by 
self-respecting and non-speculative traders, but would actually 
encourage the illegitimate use of the future contract by irre- 
sponsible and unprincipled gamesters. In other words, such 
a law would prove to be not only futile, but pernicious. 

SCOTT OR BURLESON BILL ANALYZED. 

The Scott, or Burleson bill, as it is now called, is typical 
of the anti-future measures pending in Congress. The dis- 
cussion of the provisions of this bill will, therefore, be appli- 
caiile to all tlie others pending. 

This bill in its first essential provision declares that it 
shall be unlawful for anj^ person to transmit by telegraph, 
telephone, wireless telegraph, cable, or other means of com- 



129 

munication interstate or international, any message offering" 
to make or enter into a contract for the purchase and salo 
of cotton for future delivery, without intending that suck 
cotton shall be actually delivered or received. 

Thus the lawfulness of a future contract is made to de- 
pend upon the intention of the parties thereto at the time of 
the making of the contract; and furthermore, it is not suf- 
ficient that the parties shall intend to receive and deliver 
actual cotton, but they must intend to receive or deliver the 
cotton embraced in the contract into which the parties have 
entered. In other words, under this provision, no contract 
for the future delivery of cotton shall be lawful unless the 
parties thereto shall intend under any and all circumstances 
that they themselves shall specifically perform the engage- 
ments of the contract. The penalty for the violation of this 
provision is a fine, or imprisonment, or both. 

But realizing that the intention of a man, or that dis- 
position which he holds in his secret mind^ is an illusive and 
unprovable fact, the proponents of the bill attempt to rescue 
it from utter futility by making it incumbent upon the par- 
ties to a future contract to commit themselves in the matter 
of intention by a direct statement under oath ; and in order 
to secure a conviction of unlawful intention upon these un- 
happy parties, proponents attempt to arbitrarily import a 
sinister significance into otherwise lawful actions. 

Therefore, the second essential provision of said bill re- 
quires all parties sending a message relating to a contract 
for the future delivery of cotton to make an affidavit cover-^ 
ing certain specified particulars of fact, which in effect con- 
stitutes a sworn statement that the intention of the sender 
of such message is to receive or deliver the cotton covered 



130 

by such contract; and it is provided, furthermore, that proof 
of failure to make said affidavit, or proof that the parties 
did not actually make or take delivery of the cotton called 
for in such contract, shall constitute prima facie evidence that 
there was no intention to take or make delivery of such cot- 
ton when the contract was made, and consequently that the 
same was unlawful. Violation of this provision is likewise 
punishable by fine or imprisonment, or both. 

In short, under said bill, every contract for the future 
delivery of cotton shall be unlawful unless every successive 
party thereto shall intend to deliver or receive actual cotton on 
said contract, and unless such parties shall make affidavit 
covering such intention, and finally, unless each and every 
party thereto shall actually, and in fact, specifically perform 
the terms of said contract by receiving and delivering the 
cotton called for thereby. 

WOULD DESTROY HEDGING. 

The proponents of this bill claim that they do not pro- 
pose to demoralize legitimate cotton business; they spe- 
cially disclaim any intention of destroying the hedging func- 
tion of the future contract; and they make the wholly inac- 
curate and illogical statement that their bill will not produce 
the aforementioned results, but will eliminate gambling 
transactions only. This claim and statement is based upon 
the flagrant mistake of assuming that every contract not 
liquidated by each successive holder thereof by actual receipt 
or delivery of cotton thereon is necessarily a speculative con- 
tract, when as a matter of truth and fact few of the non- 
speculative hedging contracts are ever by the parties thereto 
liquidated by such receipt or delivery. Therefore, by forcing 



131 

•each and every party to a future contract to make or take 
■actual delivery thereon, and by thus denying to any parties 
to such contract the right of selling out or transferring the 
same to other parties, the said bill strikes at the very vitals 
of the principle of hedging, and would, if it should become a 
]aw, absolutely prohibit the use of this necessary facility. 

The importance of the hedging function of the future 
contract has been heretofore emphasized, and the manner in 
"which this protection may be secured has been fully ex- 
plained. The spinner broadens his business, enlarges his re- 
-quirements and increases the consumptive demand for cotton 
by contracting to deliver his output during long future pe- 
riods ; and he could not make these forward commitments 
unless he could protect the same by buying a hedge in the 
future contract market. The buyers of cotton at the thou- 
sands of points throughout the belt, supply markets for cot- 
ton even when there is no present demand from spinners 
therefor. But these buyers could not make and carry such 
purchases unless they could protect themselves against a 
•decline in the market pending the time when they could dis- 
pose of such holdings, by selling a hedge in the future con- 
tract market. 

HOW SPINNERS' AND BUYERS' HEDGES WOULD BE 

DESTROYED. 

Under the present system of hedging, the spinner, when 
he enters into commitments to supply manufactured goods 
to the cloth merchant, protects himself by buying contracts 
for the raw cotton. The buyer, when he purchases cotton for 
which he has no order, or which he is unable at present to 
sell to the spinner, protects his purchases by selling contracts 
for future delivery. There are two future contract markets 



132 

in this country — one at New York and one at New Orleans^ — 
and one principal market abroad, at Liverpool, where hedges- 
may be bought and sold. The contracts bought and sold under 
the auspices of the cotton exchanges in said markets, specif- 
ically require that the cotton covered by the contract shall 
be delivered and received in the respective markets and at 
no place else. The parties desiring the hedges are located at 
different points throughout the entire country. Such parties, 
therefore, wire or telephone their orders to brokers in one or 
the other of the exchanges mentioned, who execute the con- 
tract for and in behalf of their principals. 

If the party in such case is a spinner, he may not, and 
in the great majority of cases does not, intend to take deliv- 
ery in New Orleans, New York or Liverpool, but expects and 
intends to select such grades as he requires at the nearest 
market when available, or out of the most desirable stock or offers^ 
which come to hand. He desires the hedge as a matter of 
protection until he has bought the spot cotton, probably from 
some merchant in his own town, and when he has so bought 
he no longer needs the contract and, therefore, sells it out to 
some other party. If he was compelled to take delivery on 
the contract, he would in the first place be by no means sure 
that he would receive the specific grades he needed; and in 
the second place, he would have to pay the freight, moving 
and carrying charges on the cotton from its point of origin,, 
(which might possibly be in the same county or town in 
which his mill was located) to New York, New Orleans or 
Liverpool, as the case might be, and thence back to his mill.. 
This would be an economic absurdity. 

The spot buyer in the multitude of Southern markets, 
under the present system of hedging, sells his contract for 



133 

future delivery either in New York, New Orleans or by a 
bare possibility, in Liverpool. He expects and intends to de- 
liver actual cotton, but not in either of said markets. He expects 
and intends to deliver his holdings to some spinner customer, 
possibly near at hand, when the latter needs supplies. He wants 
ihe future contract merely as a hedge until such time as he can 
place his stock. When he has placed the -same, he no longer needs 
the hedge contract and^ therefore^ closes it out to some other party. 
If he was compelled to make deliver}- on every such future con- 
tract into which he entered^ he could not sell to the nearby spin- 
ner, but would be obliged to ship his holdings to New Orleans, 
New York or Liverpool, as the case might be. This, also, would 
be economically absurd. 

But the bill in question says unequivocally that all contracts 
for future delivery of cotton shall be unlawful unless the parties 
thereto intend to make and take deliver}^ of the actual cotton under 
the terms thereof and shall make affidavit of such intention, and 
shall in fact so deliver and receive. The spinner in Augusta, 
Creorgia, for instance, if he bought a hedge contract in the New 
York Exchange would under the provisions of said bill be 
^compelled to take delivery in New York or else he would be 
iined or sent to jail; and the spot merchant in Augusta, if he 
:sold a hedge contract in New Orleans, would, likewise, 
under the provisions of said bill, be compelled to 
deliver in New Orleans or else pay a fine or be thrown 
into jail. Thus the spinner and merchant even in the same town, 
if they imdertook to hedge their commitments, would, instead of' 
dealing directly with each other, erect a Chinese wall between them- 
selves. ^TEedging" under the Scott or Burleson bill would not be 
a protection, but a calamity. Let no one be misled in this regard. 
If tlie -Scott bill, or any act constructed upon similar lines, should 



134 

become a law. and if its provisions should be enforced, the Ameri- 
can manufacturer and the American spot merchant would be 
summarily denied the vital and indispensable protection of the 
hedge contract. Are proponents willing to assume responsi- 
bility for such a WT.'eckage of the machinery of modern trade? 

WOULD PEOHIBIT THE (xCmjIi aXD EXCOrEAGE THE, 

BAD. 

But we have made the st-atement that not only would the bill 
in question destroy the beneficial and legitimate use of the future 
contract as a protective, or hedging agency, but it would actually 
encourage the pernicious gambling phase, which its proponents- 
claim it is designed to destroy. We have shown how the said bill 
would destroy the one, let us now consider how it would encourage 
the other. 

It has been shown that the provisions of the bill deprive 
American manufacturers and American spot merchants of the use 
of the future contract as a hedge; but how about the speculators? 
It is true that the responsible and self-respecting members of the 
speculative division of trade would, along with the spot merchants 
and spinners, refrain from laying themselves liable to a prosecution 
for perjury or a term in jail for failure to receive or deliver cotton 
called for in the contract: but how about those irresponsible and 
unprincipled speculators who would be more than willing to ply 
their trade provided they could do so without fear of being caught? 
Would this bill interfere with these ? On the contrary, it not only 
would not prevent these injurious practices, but by an express 
provision protects those who operate therein. 

The bill in question provides that a separate affidavit of inten- 
tion need not be made to cover each particular transaction, but 
that the party can give all his transactions prima facU legality by 
swearing that he will not send any messages relating to the pro- 



135 

hibited contract within the period of six months next succeeding the 
date of the affidavit. If the speculator of the undesirable class men- 
tioned undertook to execute his contract in New Orleans or New 
York, the federal authorities could trace these contracts and if it 
should be found that no cotton was delivered or received thereon,, 
the party could be convicted under the act. But suppose the party- 
should make the required omnibus six months affidavit of intention, 
and then open an office for the purpose of executing contracts on 
the Liverpool Cotton Ex-change. Prima facie all the messages 
relating to these contracts would be lawful because of the affidavit. 
But suppose the contracts concerning which the messages were sent,- 
were not lawful, but gambling ventures pure and simple. What 
danger would attend the sending of such messages and the opera- 
tions in such contracts ? True the act provides that proof of failure 
to receive or deliver the actual cotton would be prima facie evi- 
dence of the unlawfulness of the contracts. But how could this 
proof be obtained in the cases mentioned? The contracts were 
supposed to have been executed in Liverpool, and the United States 
authorities would be wholly without authority to compel the- 
English broker to disclose whether or not there had been actual 
delivery on the contracts. Ordinarily, this difficulty might be 
obviated by haling the American contract trader into court, and 
by his books proving that there had been no actual delivery; but 
the act itself by specific provision makes such a proceeding futile 
and nugatory and confers absolute immunity upon the suspect by 
the following proviso : "but no person shall be prosecuted or sub- 
ejected to any penalty or punishment whatever for or on account 
"of any transaction, matter or thing concerning which he may 
"testify or produce evidence of any character whatever." 

Thus in logical and inevitable effect, the act would not only 
destroy the good that is in future contract trading, but would 
encourage and protect the bad. 



136 

BASED UPOX WRONG PEIXCIPLE. 

Our limited space will not permit us to go into a discussion 
-of the specific injurious effects that would follow the enactment 
of the measures criticized. Enough has heen said to show that 
the principle of the proposed legislation is wrong. It is based 
upon an imperfect knowledge of the subject matter of the proposed 
prohibition, and upon a reckless disregard of consequences, which 
makes it necessarily mischievous and destructive. The contrary 
principle should prevail. The end to be obtained should be clearly 
ascertained and then the appropriate and effective means to such 
end should be carefully selected and judiciously employed. This is 
a vital economic issue involving the material welfare of millions of 
people and the prosperity of one of the great industries of the 
world. Congress has no more right to single out the cotton trade 
to experiment thereon b}" the application of nostrums, or the enact- 
ment of rough-house legislation designed to satisfy the prejudice 
or to advance the prestige of certain of its members, than has a 
cotton exchange, for example, the right to enact laws and rules 
which will enable some of its members to prey upon the great 
industry and to mulct the multitude of people concerned therewith. 

In the next succeeding article we will bring this series to a 
close with certain recommendations for legislation based upon the 
analysis of the subject attempted in these columns, and animated 
by what we apprehend to be a proper consideration for all the 
.great interests involved. 



137 

CHAPTER XVIII. 

Remedial and Regulative Legislation. 

Assuming that future contract trading per se is not only 
beneficial to the cotton trade but necessary thereto ; and 
admitting that the system under which future contract trad- 
ing is presently operated is faulty in some respects and has 
in some instances developed drawbacks which not only mili- 
tate against the efficiency of the contract as a trade agency, 
but which injuriously affect the market for the commodity 
which is the subject of the transaction, it then follows that 
the task before us is to devise some legislative measure whicli 
will, in the first place, establish a proper and equitable system 
of future contract trading; and which will, in the second 
place, eradicate the known evils that exist and prevent i 
recurrence of the same. 

SUMMARY OF THE GOOD TO BE MAINTAINED AND 
THE EVILS TO BE ABATED. 

Our investigations have disclosed that a Middling basis 
■contract, permitting the delivery of spinnable and merchant- 
able grades only, based upon the grade standards promul- 
gated by the United States Government, and settled on the 
relative actual or commercial difference in value between the 
basis grade and the other grades delivered, existing in the 
market where the contract is made and at the time the same 
is liquidated, is the typically fair contract and the only con- 
tract that would or can be traded in to an ex^^nt sufficient 
to make it serve its economic purpose. 

We have also found that the evils which h^ve attached 
themselves to the system of future contract trading proceed 



138 

from two , general causes : first, excessive speculation in the 
contract; and second, unfair and partial rules and regulations 
of an exchange which give certain individuals an advantage,, 
impair the trade utility of the contract and adversely affect 
the value thereof. Under the head of speculation, we have 
endeavored to show that the harm proceeded, not from specu- 
lation per se, but from encouragement to speculate offered to 
those who were not qualified to participate therein, and from 
gambling wages effected in certain evil institutions known 
as '' Bucket Shops." Under the head of unfair and partial 
rules and regulations of exchanges, we have found that the- 
fundamental evil lies in the claim to irresponsibility which 
a certain exchange endeavors to maintain; and we have found 
that the particular and specific causes of harm lie in th<^?- 
refusal of such exchange to adopt fair and authoritative 
standards of classification, in the rule compelling settlement 
of contract deliveries to be made on the basis of fixed arbi- 
trary and incorrect grade differences; and finally, in the 
imposition of burdens and hardships upon the receiver of 
cotton in the contract for future delivery. 

Addressing ourselves to these merits and demerits, we- 
would recommend the passage of a 'Federal Statute which 
would fix the status of a legitimate contract as pointed out,, 
and correct and prohibit the obvious abuses thereof. Th^ 
difficulty lies in differentiating the permissible and beneficial 
class of future contracts from the class which is bad and 
should be prohibited. A wholesale prohibition would result 
in much more harm than good, and an unintelligent tinkering 
with the question would prove mischievous if not destructive. 
The object of the exposition and analysis attempted in this 
series of editorials is to aid in reaching a just conclusion in 
this regard. 



139 

It is submitted that a bill drafted on the following lines 
would cover the several particulars pointed out and answer 
the several requirements specified. 

THE PROPER BILL. 

A BILL 

to prohibit the use of the instrumentalities of interstate and 
foreign commerce, such as railroads, ships and vessels, 
mail, telegraph, telephone and express companies, from^ 
being used to conduct or to aid or assist in conducting: 
interstate and foreign transactions, or interstate or' 
foreign contracts for the purchase or sale of gambling, 
contracts for the future delivery of cotton, and to pro-- 
hibit such contracts. 

SECTION 1. BE IT ENACTED BY THE SENATE AND' 
HOUSE OF REPRESENTATIVES OF THE UNITED' 
STATES IN CONGRESS ASSEMBLED: 

That every contract, order, direction or request trans- 
mitted directly or ' indirectly by mail, by telegraph or by 
telephone, or by ship, vessel or railroad or by express or by 
any other means of communication from a person, firm, cor- 
poration or association in one state, or territory, or in the" 
District of Columbia, or in any foreign country, to another' 
person, firm, corporation, or association in another state or 
territory, or from any foreign country to another state or 
territory, or to the District of Columbia, for the purchase or 
sale of cotton for future delivery in or on the floor of or 
under the rules of any cotton exchange or association whose* 
members, or allowed habitues, or authorized visitors, deal in 



such contracts, either as brokers or as principals, or else- 
where, is hereby declared to be a transaction of interstate 
commerce or of commerce with foreign countries. 

Sec. 2. That all such contracts, orders, directions or 
requests for the purchase and sale of cotton for future de- 
livery where the intention of the parties is not to make or 
receive an honest and bona fide delivery of cotton, are hereby 
declared to be gambling transactions. 

Sec. 3. That all transactions for the purchase and sale 
of cotton comprehended in Section 1 hereof, except as here- 
inafter declared and specified: and all the transactions com- 
prehended in Section 2 hereof, are hereby prohibited and 
made unlawfuL illegal, null and void, and the person, firm 
or corporation that pays any money, or gives anything of 
value in settlement or in payment of such prohibited contract 
shall have the right to recover the same in any court of the 
United States having jurisdiction of the receiver. This right 
shall be barred by the limitation of one year from the date 
of the payment or delivery of anything of value. 

Sec. 4. Be it further enacted, etc.. That it shall be un- 
lawful for any person, firm, corporation or association to 
send or cause to be sent from one state or "territory of the 
United States or the District of Columbia to any other state 
or territory of the United States, or the District of Columbia, 
or to any foreign country, by mail or by telegraph,. Telephone, ship, 
vessel, railroad or express company, or knowingly to receive or 
knowingly to cause to be received in any state or territory 
of the United States, or the District of Columbia, by mail, 
or by telegraph, telephone, ship, vessel, railroad or express 
company, any letter, telegram or message, or written or 
printed order relating to a contract for the future delivery 
of cotton such as is prohibited in this act. 



141 

Sec. 5. Be it further enacted, etc., That it shall be un- 
lawful for any person, firm, corporation or association own- 
ing or operating any interstate or foreign telegraph, or tele- 
phone, or ship, or vessel, or railroad, or express company, or 
any person acting as officer, agent or employe of such owner, 
knowingly to use, or knowingly to allow the use of such 
property for the transmission from any foreign country, or 
from one state or territory of the United States, or from 
the District of Columbia, to any state or territory of the 
United States or the District of Columbia, or knowingly to 
receive, or knowingly to cause to be received in any state or 
territory of the United States or the District of Columbia 
from any other state or territory of the United States or 
the District of Columbia, or from any foreign country, any 
letter, telegram, message, or written or printed order relatinsf 
to a contract for the future delivery of cotton such as is 
prohibited in this act. 

Sec. 6. Be it further enacted, etc.. That the provisions 
of this act shall apply to all interstate and foreign contracts 
for the future delivery of cotton which fall within the pro- 
visions of Section 2 of this act, no matter where or by whom 
executed, and shall apply to all interstate and foreign con- 
tracts for the future delivery of cotton, executed in or on or 
by the members of, or brokers of, or allowed habitues, or 
permitted visitors of all so called cotton exchanges or asso- 
ciations of persons, which do not expressly and clearly pro- 
vide by their rules or by their by-laws as follows, and do not 
with proper diligence enforce such rules : 

1st — That every contract to buy or sell cotton for future 
delivery made on its floor, or under its rules, or between its 
members, or between its members and third persons is an 



142 

-enforceable obligation to deliver and to receive actual cotton 
BS specified in the contract, and that any stipulation or under- 
standing to the contrary between the parties is prohibited. 

2d. — That the standards of grades adopted and established 
by the United States Department of Agriculture shall be the 
standards upon which Spot Quotations are based and future 
contracts settled in all exchanges situated in the United 
States. 

3rd. — That all contracts for the sale of cotton for future 
delivery executed in any exchange in the United States shall 
be on the basis of the Middling grade of the Standards of 
the said Department of Agriculture, unless particular grades 
are by special agreement specified; and no grade below Good 
Ordinary and no grade above Middling Fair on the said 
•Standards, and no unmerchantable cotton of any grade what- 
ever shall be deliverable on said contracts. 

4th. — Where cotton other than the basis grade is deliv- 
ered on a future contract, the difference above or below the 
contract price which the receiver shall pay for such grades, 
shall be determined by the actual di'fference in value between 
such grades and the basis grade found to exist in the market 
for spot cotton where the exchange is located and at the time 
when the cotton is delivered and received; and no arbitrary 
difference in value between the several grades shall be fixed 
or established by or under any rule or by-law of the exchange. 
5th. — Where in contract deliveries a certificate of grade 
is issued by the exchange, then such certificate must show 
upon its face the grade of each bale certificated, identifying 
the same by mark or number with its grade. 

6th. — The reporting of false or fictitious sales, and all 
fraudulent conduct by a member with another member or 



143 

with a non-member shall be punished by expulsion from the 
exchange. 

Sec. 7. — Be it further enacted, etc., That the United 
States Bureau of Corporations is hereby specially charged 
with the duty of examining from time to time, the rules, 
regulations and by laws of all Cotton Exchanges and asso- 
ciations, for the purpose of discovering whether they comply 
with the provisions of this Act, and it shall report the result 
of such examinations to the District Attorneys of the respec- 
tive districts in which such exchanges or associations may be 
located. 

Sec. 8. — Be it further enacted, etc.. That any person who 
shall violate any of the provisions of this act shall, upon con- 
viction thereof, be punished for each offense by a fine of not 
more than one thousand dollars nor less than two hundred and 
fifty dollars, or shall be imprisoned for not more than six 
months nor less than one month, or both. 

Sec. 9. Be it further enacted, etc.. That this act shall go 
into effect within ninety days from the date of its approval 
by the President, and that all laws and parts of laws contrary 
to or in conflict with the provisions of this act be and the 
same are hereby repealed. 

sum:mary. 

This bill would make cotton future contracts executed 
on the floor and under the rules of the exchanges, transac- 
tions of interstate commerce and, therefore, subject to the 
regulative power of Congress : it would declare that all con- 
tracts for the future delivery of cotton where the parties 
intended not to make delivery were gambling contracts; and 
it would prohibit and nullify such contracts and would deny 



144 



the use of the mails and the instrumentalities of interstate 
commerce to these gambling transactions. Thus Bucket 
Shopping and kindred practices would be annihilated. 

But the bill goes further: It would regulate the ex- 
changes in which future contract business is transacted, by 
denying the use of the mails and instrumentalities of inter- 
state commerce to all such transactions unless the rules of 
the exchange in which they were consummated provided for 
certain specified standards of settlement and enforced cer- 
tain principles of correct method and fair dealing. 

And finally, the regulative function of the proposed law 
is made effective by lodging in one of the departments of 
the Federal Government the authority to see that the man- 
dates of the statute are observed. 

If our understanding of the nature, functions and neces- 
sity of future contract trading is correct, and if our diag- 
nosis of the faults and evils of the system, as it has been in 
instances operated, is true, then the proposed bill will strike 
at the evils only, while permitting and encouraging the ben- 
eficial and protective functions of forward trading. 



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